Performance audit, Department of Administration, Personnel Division

PERFORMANCE AUDIT
DEPARTMENT OF ADMINISTRATION
Personnel Division
Report to the Arizona Legislature
By the Auditor General
October 1 993
93- 6
DOUGLAS R. NORTON, CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
DEBRA K. DAVENPORT, CPA
OEPVTI AUOITOR TENERIL
October 14, 1993
Members of the Arizona Legislature
The Honorable Fife Symington, Governor
Mr. J. Elliott Hibbs, Director
Department of Administration
Transmitted herewith is a report of the Auditor General, A Performance Audit of the
Department of Administration, Personnel Division. This report is in response to a
December 13, 1991 resolution of the Joint Legislative Oversight Committee and is the
first of six audits scheduled on the Department.
To meet the needs of its users the Personnel Division must alter the manner in which
personnel services are provided. Our audit work found that in the most important
service areas - hring, classification, compensation, and benefits - Arizona's current
personnel system does not respond to its users' needs. The Federal Government and
many other state and local governments are examining or discarding personnel systems
that rely on extensive rules and restrictions and are building systems that offer the
flexibility and responsiveness needed to provide efficient, effective service.
My staff and I will be pleased to discuss or clarify items in the report.
Tlus report will be released to the public on October 15, 1993.
Sincerely,
DOU&& R. Norton
Auditor General
2910 NORTH 44TH STREET 1 SUITE 410 * PHOENIX, ARIZONA 85018 ( 602) 553- 0333 FAX ( 602) 553- 0051
SUMMARY
The Office of the Auditor General has conducted a performance audit and Sunset
Review of the Department of Administration, Personnel Division, pursuant to a
December 13, 1991, resolution of the Joint Legislative Oversight Committee. The audit
was conducted as part of the Sunset Review set forth in Arizona Revised Statutes
( A. R. S.) § § 41- 2951 through 41- 2957, and is the first of six audits scheduled on the
Department.
In order to meet the needs of its users, Arizona must significantly revise the manner in
which personnel services are provided. Our audit work found that in the most important
service areas -- luring, classification, compensation, and benefits -- Arizona's current
personnel system does not respond to its user's needs. The Federal Government and
many other state and local governments are examining or discarding personnel systems
that rely on extensive rules and restrictions in favor of systems offering the flexibility
and responsiveness needed to provide efficient, effective service.
The State Needs To Redesign
Its Outmoded Hiring System ( see pages 5 through 12)
Currently, Arizona's hiring system can deter the best candidates from entering State
service. The hiring lists provided by Personnel often contain unqualified or unavailable
candidates. Some hiring supervisors stated that it was often difficult to find even one
qualified, available applicant on lists submitted to them. In addition, the Division
requires agencies to follow policies that are often counterproductive to effective luring.
For example, we identified one case where a supervisor was required to offer an
interview to a candidate who did not speak English for a position that involved working
with the public.
A comprehensive reform effort is needed to change Arizona's hiring system to allow
agencies increased flexibility and service. Such reform will require revision of rules and
statutes that restrict agencies' hiring options. In addition, more immediate changes in the
Division's operating practices are also needed, including the use of supplemental
applications, increased participation of agency supervisors in candidate evaluations, and
recruiting at colleges and job fairs.
DOA Needs To Address Fundamental
Problems With The State's Classification System
( see pages 13 through 17)
Arizona's classification system is not being properly maintained or managed. While
positions should be reviewed periodically to ensure that job duties, qualifications, and
compensation are still appropriate, in the last 5 years, the Personnel Division has
conducted reviews of only 22 percent of the 1,500 classifications in State government.
According to DOA officials, regular classification reviews were discontinued because
there was not enough funding to implement salary upgrades which often result from
such reviews. However, failure to maintain the system hampers the State's recruitment
efforts, and results in inappropriate employee compensation. While DOA is considering
significant changes to the classification system, their efforts may be premature,
particularly until an assessment of needed changes is developed and funding issues are
addressed.
DOA Should Improve Efforts To
Inform Decision Makers On Salary Issues
( see pages 19 through 23)
Although State employees are an essential resource of State government, employee
salaries have not remained competitive. While State salaries were only 7 percent behind
the market in 1988, lack of salary increases has now widened the gap to over 22 percent.
As a result, State agencies have difficulty attracting and retaining high- quality
employees. While DOA is responsible for presenting salary recommendations to the
Legislature, it has based these recommendations on available funding rather than
presenting the results of its analysis to policymakers and allowing them to determine the
course of action. As the State's expert on compensation, DOA needs to provide the
Governor and Legislature with timely, objective, and comprehensive reports detailing
various alternatives.
DOA Needs To More Proactively Manage
Its Employee Health Benefits Program
( see pages 25 through 30)
The Personnel Division needs to more proactively manage State employee health care
insurance benefits. In 1992, in an effort to meet the Governor's demand that there be no
increases in State funding for employee health care insurance, the Division made several
controversial decisions. These decisions resulted in increased costs and/ or reduced
services for a number of current State employees and retirees alike. Further, the
decisions were made with little input from the Legislature or State employees. To
prevent similar problems from occurring in the future, the Personnel Division needs to
ensure the State's health care needs are defined in conjunction with the Legislature and
State employees; that usage is monitored; and that its Request for Proposals is specific.
Further, whenever a new contract is awarded, DOA needs to ensure that employees are
adequately notified, and that the carrier's performance is monitored.
DOA Should Implement Mechanisms To Curb
Escalating Health Care Benefit Costs
( see pages 31 through 36)
With State employee health benefits costing $ 168 million annually, and continuing to
rise, DOA needs to adopt measures to curb these costs. DOA should consider imple-menting
cost containment measures ( such as comprehensive wellness programs and
eligibility audits) that are utilized in other states and private industry. In addition, it
should monitor State health care expenditures to target costly areas needing additional
efforts.
Table of Contents
Page
Introduction and Background . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finding I: The State Needs To Redesign
Its Outmoded Hiring System . . . . . . . . . . . . . . . . . . . . . . . .
State Hiring Process Has
A Multitude Of Problems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Major Reforms
AreNeeded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finding II: DOA Needs To Address
Fundamental Problems With
The State's Classification System . . . . . . . . . . . . . . . . . . . .
Classification System Is
A Crucial Element . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Poor System Maintenance
Due To Lack Of Funding
And Review Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Neglect Affects Several Vital
Components Of Personnel System . . . . . . . . . . . . . . . . . . . . . . .
Proposed Changes Premature Until
Funding Is Addressed And
Needs Assessed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Table of Contents ( Con't)
Page
Finding Ill: DOA Should Improve
Efforts To Inform Decision
Makers On Salary Issues . . . . . . . . . . . . . . . . . . . . . . . . . . .
State Employee Salaries Lag
Behind The Market And Inflation . . . . . . . . . . . . . . . . . . . . . . . .
Low Salaries Impact Recruitment
AndRetention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DOA Should Provide Decision Makers
With Information And Options . . . . . . . . . . . . . . . . . . . . . . . . . .
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finding IV: DOA Needs To
More Proactively Manage
Its Employee Health Care
Benefits Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decisions Made To Contain
Costs Result In Controversy . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number Of Actions Needed
To Avert Future Problems . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Actions Needed
Once An Award Is Made . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Table of Contents ( Concl'd)
Page
Finding V: The Division Should Implement
Mechanisms To Curb Escalating
Health Care Benefit Costs . . . . . . . . . . . . . . . . . . . . . . . . . .
Health Benefit Costs
Rapidly Rising At The
National And State Levels . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Division Should Consider
Aggressive Cost Containment Measures . . . . . . . . . . . . . . . . . . .
Personnel Division Needs To Monitor Costs
To Effectively Target Its Cost Containment Efforts . . . . . . . . . . .
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agency Response
INTRODUCTION AND BACKGROUND
The Office of the Auditor General has conducted a performance audit and Sunset
Review of the Department of Administration, Personnel Division, pursuant to a
December 13, 1991 resolution of the Joint Legislative Oversight Committee. The audit
was conducted as part of the Sunset Review set forth in A. R. S. § § 41- 2951 through
41- 2957, and is the first of six audits scheduled on the Department.
Reform Of The Personnel System Is
Needed To Ensure A Balance Of Fairness
Against Efficiency And Effectiveness
" The primary organizational problem personnel management faces is that of
balancing the goals of protection and eficiency. Should public administration
be organized to protect employees from the " adverse" consequences of political
patronage, or to maximize the eficiency of service delivery?"'
In order to meet the needs of its users, Arizona must significantly revise the manner
in which personnel services are provided. The basic principles of a civil service system
are to ensure fairness and equality. However, recent trends in government have been
to make personnel systems more responsive to user needs while continuing to uphold
these principles.
Despite these trends, Arizona's personnel system is not responsive to its users in
several important service areas. Although some efforts are being taken to change the
system, a comprehensive approach will be necessary for effective reform.
Civil Service Designed
To Ensure Fairness
Civil service or " merit" systems are comprised of the laws and rules developed to
uphold principles of fairness, equality, and open competition in all areas of public
sector personnel management. More than 25 years ago, Arizona established a merit
system for State employees under a centralized personnel authority. This system
included provisions for selection decisions based on applicant qualifications, fair and
open competition for positions, evaluations of employee performance, the creation of
a salary plan and a system of classifying positions, establishment of employee
1. Daley, D. 1990. " Organization of the Personnel Function: The New Patronage and Decentralization. " Public
Personnel Administration Problems and Prospects. Englewood Cliffs, N. J.: Prentice Hall, pp. 21- 37.
grievance procedures, and other measures designed to ensure employees receive fair
and equitable treatment in all aspects of personnel management.
Recent Efforts Designed
To Create More Responsive
Personnel Systems
Although merit system principles continue to have broad- based acceptance, civil
service laws and rules that were often enacted decades ago are increasingly seen as
straightjackets which prevent systems from being efficient and flexible, as is demanded
by economic and social conditions in today's workplace. These systems were
characterized more than 45 years ago as the " triumph of technique over purpose," because
public personnel managers became so enamored of the techniques by which their
work could be done that they lost sight of what they were supposed to do. As a
result, instead of facilitating the organization's work and mission, public personnel
offices often assume a policing function that hinders effective management.
This situation has led the Federal government, as well as many states and local
governments, to examine and discard personnel systems that rely on extensive rules
and restrictions, and build systems that are flexible and responsive. A 1993 survey by
the National Association of State Personnel Executives found 33 of the 48 states
responding ( including Arizona) are undergoing some form of personnel reform, with
seven states embarking on extensive reform of their civil service. These " reformed"
public personnel systems operate more as customer service organizations. For example,
the State of Washington recently enacted legislation that changes the civil service
system objective from control to customer service. Minnesota also concluded that its
50- year old personnel system "... is too complex and unresponsive to meet the needs of
government and the people it serves" and has initiated efforts to increase their system's
flexibility and decentralize many decision- making responsibilities to agencies.
Arizona's System Unresponsive In
Several Important Areas
The characterization " triumph of technique over purpose" is clearly applicable to the
Arizona personnel system. Our audit work, presented in Findings I through V of this
report, suggests that in the most important service areas -- hiring, classification,
compensation and benefits -- DOA is not responsive to the needs of its users. This
includes a broad definition of users, from agency management, to individual
employees, to the Legislature. A logical conclusion about the role of the Personnel
Division can be drawn from the problems we identify in this report. In those areas
in which the Division should be active, providing services they are best suited for and
communicating needs ( i. e. classification, compensation, and benefits), DOA officials,
through conscious policq~ decisions or neglect, have been passive, thereby failing to
meet users' needs. Conversely, in the area of hiring, where users ( agencies) desire
limited involvement by Personnel in the form of advice and direction, DOA has
chosen to take a strong and active role. This role includes establishing and enforcing
rules that significantly limit agency administrators' decision making in the selection
of their single most important resource: employees. These facts suggest a system that
will require more than just minor changes to correct.
Significant Reforms
Are Necessary
Currently, DOA is taking some steps to change its system. However, recent
experiences in other states suggest that more substantial reform efforts will be
necessary in Arizona.
Based primarily on the recommendations of the 1992 SLIM evaluation of the Personnel
Division, DOA has initiated efforts to improve the provision of personnel services.
These include:
I
The creation of a task team comprised of Personnel Division and State agency
representatives, charged with redesigning the State hiring process.
A study of the current job evaluation methodology utilized in the State's
classification system.
The formulation of a strategic plan for future personnel services.
It is too early to determine the value of these projects, because at the time of this
writing, they are either incomplete or their conclusions and recommendations remain
in draft form. However,. these efforts appear fragmented since there is little or no
coordination between the projects, although they share many common goals. Further,
some analysts of public personnel reform would characterize these efforts as " tinkering
at the margins," and suggest that to effectively change Personnel's role, more
meaningful reforms will be necessary.
Audit Scope
Our audit report of the Department of Administration's Personnel Division presents
findings and recommendations in five areas:
The need for improvement in recruiting State employees
The need to strengthen the State's current employee classification system
H The need for improvement in employee compensation practices
The need to strengthen the health care benefits process
H The need for improvement in the area of health care cost containment
This audit was conducted in accordance with government auditing standards.
The Auditor General and staff express appreciation to the Director and staff of the
Department of Administration and its Personnel Division for their cooperation and
assistance throughout the audit.
FINDING I
THE STATE NEEDS TO REDESIGN
ITS OUTMODED HIRING SYSTEM
" Government is a service business. It doesn't produce a product nor does it depend
principally upon technology to accomplish results. It depends largely upon people:
providing services, making policy judgements, consulting with elected
representatives and citizens on what services should be provided. Government
probably more than almost any other business, is dependent upon the quality, the
judgement, and the motivation of the people who work on the front lines. "("
Arizona's hiring system should enable the State to attract and hre the very best of
those people interested in State service. The current hiring system falls short of this
goal and may actually impede agencies' abilities to hire the best applicants. The
solution is a system overhaul -- one which will include significant changes in the way
Personnel does business, major rule revisions, and the possibility of statutory change.
Until the system is redesigned, DOA Personnel should use all available means to
provide better service and increase agency participation in the current hiring process.
State Hiring Process Has
A Multitude Of Problems
The State hring system can deter the best candidates from obtaining jobs. According to
hring supervisors, the hiring lists provided by Personnel often contain unqualified
candidates. Additionally, most agencies are forced to operate within a maze of rules and
policies that at times border on the ridiculous. Others have been able to get DOA's
authorization to circumvent policies that hnder effective hring decisions. Some agencies,
frustrated with the centraked hiring services, have obtained authority to perform the
hring functions themselves.
Hiring process ovmiew - The Employment Section in DOA Personnel provides
employment services to most State agencies, and its primary product is a hring list.
When a supervisor becomes aware of a vacancy, he or she submits a requisition to
Personnel. I€ there is an existing register of candidates for the position, Personnel
generates a hring list from the register, sometimes performing additional screening to
identify special qualifications. When no register exists, a Personnel Analyst will advertise
the position, screen each application to determine whether minimum qualifications are
1. The Washington State Commission for Efficiency and Accountability in Government. Workforce 2000
Personnel System Study, Final Report. March 1990, page 1.
5
met, and then give numerical scores to those applicants meeting the qualifications.' The
top seven scoring candidates will be placed on a hiring list and sent to the supervisor. 2
The list is intended to provide the supervisor with a small group of candidates best
qualified for the position.
& ring supervisors are generally dissatisfied with the results of this process. In a survey
of hring supervisors conducted by the Human Resources Hiring Process Task Team;
when asked, " Haw would you rate the present hiring process in meeting your needs", 50
percent of the 258 hring supervisors responding rated it as poor or below average, whle
37 percent rated it as average, and less than 7 percent rated it as either above average
or excellent
Hiring- lists contain unsuitable candidates - After waiting up to eight weeks for a hiring
list, supervisors often find candidates unsuitable. During our audit work, many
supervisors conveyed a variety of problems with the lists, such as: the candidates are
unqualified, unavailable, or uninterested in the job; and the lists may be months old and
contain candidates who have been hred, or were previously interviewed and rejected.
Due to the lack of suitable candidates on the list and their inability to review additional
applications, some supervisors have felt forced to hre candidates who they felt were
unqualified for the job. For example, we tracked the outcome of 24 h n g lists generated
between October 1992 and March 1993.4 Of the 24 positions, 3 were filled with a person
the supervisor felt was unqualified to do the job. The three positions included an
Eligibility Interviewer, a Training Officer, and a Transportation Engineering Specialist who
the supervisor said did not have appropriate roadway design experience. Two supervisors
canceled requisitions, preferring to leave positions vacant rather than to hre from the list.
Other supervisors expressed relief that they had been able to find one qualified, available
person from the list provided. In fact, 17 of the 24 supervisors would have reviewed the
applications of additional applicants if they had the ability.
Presented below are comments made during our telephone survey by different
supervisors regarding the quality of candidates.
1. Approximately 80 percent of job candidates meeting the minimum qualifications are scored by
Personnel Analysts. The remainder are scored through written examination or skills declaration.
2. The hiring list may have more than seven candidates if groups of candidates have equal scores. For
example, if 5 candidates score 90 and 10 score 80, the list will contain all 15 candidates because all
equally scoring candidates must appear.
3. The task team resulted from a Project SLIM study that identified significant inefficiencies in the hiring
system. The multi- agency team is designing hiring process changes to improve efficiency and service
to agencies.
4. The sample was designed to ensure a broad mix of position types, State agencies, and Personnel
Analysts. The 24 hiring lists selected involved 9 different job serles -- 10 different grade levels within
grades 9 through 24, 11 agencies, and 9 different Personnel Analysts.
. ~ s u a l l y1 am grasping at strazus to find even one marginally qual@ d applicant."
I . Unqualified candidates get on the hring list for a job that involves complicated and
techrucal decision making. " We have actually had people beg to be fired because they were
I so unqualifid to do the job." . When conducting interviews for a Public Assistance Eligibility Interviewer position,
I the supervisor asked the candidate what was her greatest work accomplishment
The candidate responded that it was when she finally was able to get an ice cream
cone made without the ice cream falling sideways. The supervisor said to us, " these
I are the type of people I have to intevuiezo."
Enforcenmt of ineffective policies ne- g ativelv impacts agmtcies - Personnel requires that
most hring supervisors follow existing rules or policies even when they are
counterproductive or not in the agency's best interest For example: . We identified one case where, in order to get a list of additional candidates, a
supervisor was required to offer an interview to a candidate that did not speak
English. The services of a translator were necessary. . In another case, a supervisor had only a few available candidates on the list and
because all of them worked for h s agency, he was aware of their qualifications. He
contacted Personnel and told them these people were not qual~ fied for the job.
According to the supervisor, he was told that it did not matter whether he thought
they were qualified-- based on written documents supplied by the candidates, they
were qualified. Personnel refused to provide additional names. . One manager tried to hre a current employee into a supervisory position. The
employee had managerial experience in a related field, but not in the specific field
set forth in the qualifications. Therefore, the employee was ineligible for
consideration. After trying unsuccessfully to get Personnel to reconsider, the
manager felt forced to hire a person who had not managed in several years and
had minimal experience using computers, a daily function of the position. This
individual quit witkun four weeks. Shortly thereafter, the manager also lost the
employee she had wanted to hre.
To net the hiring process to work, DOA bends the sslstem - While the majority of I sup& visors are constrained by an ineffective system, we identified numerous examples
of Personnel granting rule waivers or informal allowances to the process. For example,
while most supervisors can consider only the seven candidates provided, we found many ) cases where Personnel had granted rule waivers allowing supervisors to review all
candidates. We also found waivers allowing some supervisors to recruit at colleges or job
I fairs, which is typically unallowed. Other exceptions result from individual Personnel staff
decisions to allow agencies more flexibility. For example, one hiring supervisor was
allowed to score candidate applications himself, even though current rules prohibit agency
staff from scoring candidates. Additionally, Personnel has allowed some supervisors to
use " substitute" qualifications, whle others told us they were unable to update invalid
qualifications.
Some agencies, dissatisfied with Personnel's ability to meet their h gnee ds, solicited
and received DOA's authorization to hre independently for certain positions. For
example, the Department of Corrections has authority to recruit and staff its Correctional
Service Officer positions, and the Attorney General's Office performs hiring functions for
the majority of its covered positions.
Major Reforms
Are Needed
A comprehensive reform effort is needed to change h o n a ' s hiring system and will
require rule revisions and possible statutory changes. However, Personnel can take a
number of immediate steps to improve the process.
DOA Personnel should redefine its role fimz enforcement to service - Consistent with
personnel reform efforts across the country ( see Introduction and Background), Personnel
should reshape its organization to prioritize service to agencies and move away from
viewing its mission as rule enforcement For example, Personnel should provide State
agencies with increased options in hiring services; options whch include: 1) hring
responsibilities performed jointly by Personnel and the hring supervisor, and 2) hring
primarily done by the agency, with Personnel functioning in an advisement and
monitoring capacity.'
Additionally, agencies and Personnel should work jointly to communicate the importance
of merit principles, and to develop systems to hold supervisors and managers accountable
if they violate them.
Personnel is currently taking steps to improve service to agencies. Some agency
representatives expressed that the new administration is open to change and moving in
the right direction. Also, Personnel has a leadershp role in the Human Resources Hiring
Process Task Team. At the time of our audit, the task team was considering a number
of changes to the hring process and recommending a review of statutes and rules for
possible amendment. Because the task team is still in the process of determining needed
changes, it is unclear whether their final recommendations will address the major rule
revisions and statutory changes that are key to achieving an effective hring system.
1. Even in its new role, Personnel can ensure merit principles are followed through an expanded audit
function. As agencies take over functions now performed by Personnel, the State will need better
mechanisms to audit and correct problems. Although audits are currently done on a limited basis,
there are no positions dedicated and no formal audit schedules or procedures.
Statutow chang- es maw be needed - At least two statutes appear to prevent the achieve-ment
of needed flexibility in the hring system:
First, A. R. S. 541- 783.5 requires that candidates appear on hiring lists " in mder of
relative excellence." This statute has been interpreted to require numerical scoring of
all candidates. In some cases, however, numerical scoring and rank ordering may
not be valid or efficient The option of simply listing all candidates as " qualified" or
" unqualified" should be available when it is more efficient
Second, A. R. S. 538492 requires the awarding of preference points to veterans and
handicapped candidates who take examinations for employment. These statutes may
be adversely impacting State Affirmative Action goals and workforce diversity by
causing many W gli sts to be dominated by veterans. Because veterans receive
points over and above those of equally qualified nonveterans, the hring list may
contain & veterans when there is a high volume of qualified candidates for a
position. Wlule some public sector entities have eliminated veterans' preference
points or restricted their usage, Arizona has not
Major rule revision is needed - Some existing rules limit the State's options to respond
creatively to its diverse hiring needs. Although many of these rules can be waived, a rule
waiver requires the approval of the Personnel Director. Thus, agencies are forced to abide
by a bureaucratic system whch delays response to meeting their needs. Instead of
continuing with a system that constrains both agencies and the Personnel Division, rules
should be changed to allow flexibility to respond to diverse circumstances. Listed below
are examples of rules that may be particularly problematic.
Agencies are prohibited from administering any candidate evaluations other than
the interview
Applicants must be State residents
Supervisors must use luring lists comprised of internal promotional candidates prior
to allowing outside recruiting
Hiring lists are limited to seven candidates
firing at above entrance salary is prohibited without raising the salaries of all
current employees performing in the same job class.
Personnel should make immediate improvements - In the interim, whle statutes and rules
are being changed, Personnel can relax rules and policies to effect immediate
improvement in hiring processes. Key suggestions for change are discussed below.
Allow Agencies Greater Freedom To Design Supplemental Applications - In
some cases, especially in techrucal positions, the standard State application does not
elicit enough information speclfic to the skills needed for the job. According to the
employment law expert we consulted, there is no legal problem caused by using
supplemental applications designed by the agencies. Some agencies, such as the
Department of Economic Security, are currently using supplements to obtain more
information regarding the applicant's specific job skills.
Allow Supervisors to More Easily Update Inappropriate Job Qualifications -
Several personnel supervisors and staff told us that outdated qualifications are a
fundamental problem in the system. Additionally, 10 of the 24 hring supervisors
we surveyed said the minimum qualifications ( MQ's) for the position we inquired
about were inappropriate. Inappropriate MQ's can, if too strict, screen out good
candidates; or, if too lenient, cause unnecessary scoring and allow unqualified
candidates to receive hgh scores. Currently, MQ's can be amended on a
case- by- case basis by obtaining Personnel's permission to use a Substitute MQ.
However, according to one supervisor, " it takes an Act of Congress to get an MQ
change." Additionally, the Substitute MQ does not accomplish a permanent change,
but must be requested each time the position becomes available.
Allow Supervisors Maximum Participation In Candidate Evaluation - The majority
of hiring supervisors are not even contacted during the hring process. Candidates
not scored through written examination ( over 80 percent of candidates) are
evaluated by a Personnel Analyst, who reviews the application and awards scores
based on how closely the application reflects the abilities and experience outlined
in the rating plan. However, many hring supervisors view the analysts as not
having sufficient knowledge of the job to design the rating plan or determine
whether the candidate's experience is applicable. In addition, the rating plans are not
scrutinized for validity or reliability.
More Readily Correct Candidate Scores - Personnel should make candidate score
corrections when appropriate. If the results of investigations into a candidate's
background, education, or work hstory bring out information that affects h s or her
rating, Rule R2- 5- 205. E. 5. allows the rating to be adjusted. Many hring supervisors
provided us with examples of candidates on the hring list who did not have the
necessary qualifications, but appeared unaware that a correction mechanism exists.
Others told us that it is difficult to get Personnel to make score changes.
Allow Access To Additional Candidate Names - When hring supervisors want
to review the applications of additional candidates, Personnel should make these
available. l h s can be accomplished by enabling supervisors to review all candidates
meeting minimum qualifications ( referred to as full- list certification), or to obtain a
supplemental hiring list Personnel already uses rule waivers to make full- list
certification available to many supervisors, and should consider issuing a policy
describing the conditions in which it will be provided. In other cases, when
supervisors have documented that candidates are unavailable or unacceptable,
Personnel should release supplemental lists.
Timely Purging of Candidate Names From Registers - Personnel should ensure
that candidate registers are kept current For some positions, rather than advertising
externally, a hiring list is generated from an existing register of candidates.
However, luring supervisors complained that the lists are often outdated and
contain candidates who are either no longer available, not interested in the job, or
have been interviewed and disqualified for the position several times. Personnel is
not using the extent of its ability provided by rules to remove names from the list,
nor has it made clearing names a priority. According to one official, it may be
months before names are cleared from the lists.
Allow Targeted Recruiting - Targeted recruiting, which allows taking applications
and interviewing candidates at colleges and job fairs, should be made available to
all agencies. Personnel should consider waiving the rule on a Statewide basis, rather
than approving requests on a case- by- case basis, as is done currently.
Low salaries will continue to affect q~ mlihi of Jzires - Changes in the hring system are
of critical importance, yet the effect of State salary levels should not be underemphasized.
Whle Arizona's hring system should provide the mechanism to attract and hre the best
of those people interested in State service, salary levels that are far below market may
significantly reduce the pool of interested candidates. See Finding III for further discussion
of compensation issues.
RECOMMENDATIONS
1. DOA Personnel should begin a comprehensive reform of the State hiring system,
including:
Shifting Personnel's role from rule enforcement to service
Reviewing statutes and preparing recommendations for the Legislature
Redrafbng the Personnel rules
2. In the meantime, Personnel should relax operating practices and rules to increase
service to, and participation of, State agencies in the huing process. Particularly,
Personnel should allow:
The design of supplemental applications by agencies
An expedient method to update inappropriate job qualifications
Maximum supervisor participation in candidate evaluation
Correction of candidate scores
Access to additional candidate names
Prompt purging of names from registers
Targeted recruiting at colleges or job fairs.
FINDING II
DOA NEEDS TO ADDRESS FUNDAMENTAL
PROBLEMS WITH THE STATE'S
CLASSIFICATION SYSTEM
Fundamental issues need to be addressed in the State's classification system before
anticipated changes are made. While a classification system is an essential element of
an effective and efficient organization, the State's system is not properly maintained
or managed. This neglect impacts hiring and compensation, vital components of the
personnel system. Currently, DOA is considering significant changes to the
classification system. However, efforts to modify the existing system may be
premature, particularly until funding issues are addressed, and an assessment of
needed changes is developed.
Classification System Is
A Crucial Element
Classification systems provide large organizations, such as the State, with a structured
process to define and determine compensation for a sizeable number of positions. The
classification system is so basic and essential to an organization's functions it can be
called its " backbone." Through evaluating positions and grouping similar jobs, the
classification system provides for equitable compensation and establishes a hierarchy
of positions. For each position, the classification system should provide:
A clear and accurate description of the job and its duties and responsibilities;
The level of compensation for the position; and
A description of the skills, experience, education, and training needed for the job.
The State's classification plan, required by statute, uses the whole job method to
evaluate jobs. In this method, each position is evaluated based on factors such as:
difficulty of duties, qualification requirements, nature and scope of decisions, and type
of supervision.
Poor System Maintenance
Due To Lack Of Funding
And Review Schedule
Although crucial to the State government's effective operation, the classification system
is not adequately maintained. DOA officials indicate that lack of funding has
hampered efforts to maintain it.
Svstem is not maintained - Despite its overall importance, DOA is not ensuring that
the State's classification system remains current. To do so requires the Personnel
Division to conduct periodic reviews of each classification to determine the actual
work conducted, appropriate levels of compensation, and a comparison of position
rankings. While a prior Auditor General review of the Personnel Division ( see Report
81- 9) found the classification system had not been maintained since its adoption in
1969, our current analysis indicates a continued lack of maintenance over the last
several years. Specifically, from 1988 through 1992, only 22 percent of all State
government classifications ( representing 38 percent of all positions) have been
reviewed by Personnel. Further, some classes have not been reviewed for over two
decades. For example, according to a Personnel Division official, Right of Way Agent
classes at the Arizona Department of Transportation have not been reviewed since
1968. In fact, the system is so neglected that DOA could not confirm for us the
reviews done in the past ten years, until a list was constructed specifically at our
request.
Lack of funding irnpacts efforts to maintain svstem - According to DOA officials, a
lack of funding to implement salary adjustments resulting from classification reviews
hampers the Personnel Division's efforts to maintain the system. These officials
indicated that after the Legislature chose not to fund the salary adjustments associated
with several reviews completed by the Personnel Division in 1989, DOA elected to
discontinue any regular program of classification reviews. Instead, reviews are limited
to those agencies able to assure funding for any recommended upgrades, or those that
can show they are experiencing operating problems stemming from outdated classi-fications.
Neglect Affects Several Vital
Components Of Personnel System
Fundamental elements of the personnel system cannot function properly when the
classification system is not kept current. Because of outdated job descriptions, agencies
are often unable to recruit candidates with the skills to meet the agencies' needs.
Further, failure to perform classification reviews results in compensating employees
inappropriately.
Hiring i~ rzpacted hi outdated specificntiosts - Hiring, crucial to an effective State
government, is hampered when position specifications are not kept up- to- date.
Maintaining current position specifications, including minimum qualifications ( or the
minimum education, experience, and skill requirements considered necessary for a
position) are a basic function of the classification process. As such, when classifications
are not kept current, applicants are screened using minimum qualifications that no
longer reflect the job functions. For example:
PUBLICA SSISTANCE LIGIBILITINYT ERVIEWERS
Employees in this position authorize significant State expenditures of welfare
monies and other entitlement programs. Qualities needed in these positions
include: decision- making skills, investigative skills, ability to interpret laws, and
the ability to do math calculations. However, according to DES officials,
applicants passing minimum qualifications are those with only receptionist and
public contact experience, such as working at fast- food restaurants.
TRANSPORTATIOENG INEERS
These classifications have not been reviewed in over a decade and include
minimum qualifications requiring construction experience, which, according to
ADOT officials, " severely limits our ability to hire" because " we do not need
constvuction" experience in this particular position.
PLANNERS
According to agency management, the best candidates are eliminated from
consideration. Applicants with research and environmental planning skills are
screened out by the requirement for supervisory experience, which management
feels is unnecessary for this position. This class has not been reviewed since 1976.
Lack of classification reviews affects conzyensation - When classification reviews are
not performed on a regular basis, the State's system of compensating employees is
affected in several areas. Pay grades are established from determination of what is
appropriate compensation for job duties, responsibilities, and qualifications. As such,
when classification reviews are not current, inequities may occur between what is
appropriate pay for functions performed in a position and pay actually received.
Inequities may also result between positions when employees perform jobs similar in
responsibilities and duties, but receive different compensation.
Proposed Changes Premature
Until Funding Is Addressed
And Needs Are Assessed
DOA is currently evaluating substantial changes to the State's classification system.
However, these changes may not be needed to ensure an effective classification
system. Before attempting to modify the system, DOA should assess what changes will
be most effective. DOA should also address the historical problems of obtaining
funding for the system. Finally, DOA should evaluate a new classification strategy
with important implications for reforming the personnel system.
Proposed chan- g es to have significant impacts - Based on the 1992 SLIM report on the
Personnel Division, an outside consultant is reviewing the job evaluation methodology
utilized in the current classification system. The consultant is anticipated to
recommend that DOA adopt a new and significantly different job evaluation
methodology that ranks positions based on an assignment of points to the various
functions performed in each job. However, if DOA accepts this recommendation, a
considerable initial investment, preliminarily estimated at $ 68 million for the first year,
will be needed. This estimate includes expenditures for:
New computer software and hardware;
Training for classification analysts; and
Initial salary adjustments associated with the review.
In addition, agency operations will be impacted by the need for managers and
employees to participate in detailed analysis of descriptions and job duties of all
current positions, while morale and productivity may suffer if employees become
concerned about positions being affected or eliminated.
Changes maw not be necessaw - Making significant and costly changes to the
classification system may not be needed to ensure its effectiveness. Preliminary reports
from DOA's consultant indicate that a new job evaluation methodology is needed to
reduce the number of classifications and eliminate the " subjectiveness" of the current
methodology. However, personnel experts we have spoken with indicate that the
number of classifications could be reduced using the current methodology, and that
the point factor methodology the consultant is anticipated to recommend is susceptible
to similar criticisms of subjectiveness. These factors suggest that, before embarking on
a major effort to change the job evaluation methodology of the current classification
system, DOA should first determine what it hopes to achieve from any changes, and
then seek the necessary legislative support. Specifically, DOA needs to determine those
changes that will best assist State agencies in accomplishing their missions. Modern
classification systems recognize organizational needs and are designed to incorporate
such factors as:
Responsiveness to organizational change
Career development
Employee performance and accountability
Flexible compensation programs
Delegation of classification responsibilities
However, our audit work indicates that DOA has made only a limited effort to obtain
input from stakeholder groups. While DOA's consultant conducted interviews of
agency administrators, employees and legislators who also have an interest in the
creation of an effective classification system were not contacted.
To ensure the classification system's effectiveness, DOA must also address the
historical absence of funding needed to maintain it. As discussed earlier, DOA has
basically halted any efforts to maintain the current classification system, based on the
perception that the Legislature will not fund the salary adjustments associated with
reviews. Any future systems will also become outdated if they are not maintained.
Before DOA can embark on any effort to revamp and upgrade the classification
system, legislative involvement and support will be an important step.
Franzework for modern classification s~ starzsl zould be evaluated - When assessing the
most appropriate changes to the existing system, DOA should also evaluate a new
model for classification systems that has important implications for reforming the
overall personnel system. This model, developed by the National Academy of Public
Administration ( NAPA) for the Federal government, classifies work, rather than
positions, because " classifiing work places an organization in the best posture to develop,
promote and use the skills of its work force." By grouping similar classes together, and
establishing levels that allow for logical career paths within each class, the NAPA
model supports a flatter organization, values generalists and the knowledge and skills
of workers, allows greater job mobility, and encourages employee development.
Several public and private entities are implementing or studying NAPA's
broadbanding model, including the States of Minnesota and Washington, nationally
recognized for their efforts to reform their personnel systems. Both states are using the
broadbanding model not only to flatten their organizations, but to create an
atmosphere that will be conducive to changing their personnel systems.
RECOMMENDATIONS
DOA should develop a plan to establish the future purpose and direction of the State's
classification system. This plan should include:
What State government hopes to achieve from its classification system,
The strategies to reach these goals, including the most appropriate framework
and method of job evaluation, and
An approach to obtain legislative support for the need to maintain and enhance
the classification system.
FINDING Ill
DOA SHOULD IMPROVE EFFORTS TO
INFORM DECISION MAKERS ON SALARY ISSUES
Although State employees are an essential resource of State government, employee
salaries have not remained competitive. While salaries were only 7 percent behind the
market in 1988, lack of salary increases has now increased the gap to over 22 percent.
As a result, State agencies have difficulty attracting and retaining high- quality
employees. To date, DOA's efforts to impact compensation decisions have been
curtailed due to the timing of its recommendations, as well as DOA's tendency to base
its recommendations on available funding after all other budgetary priorities have been
addressed. For DOA to have a meaningful impact on compensation decisions, it needs
to provide the Governor and Legislature with timely, objective, and comprehensive
reports detailing various alternatives.
State Employee Salaries Lag
Behind The Market And Inflation
Lack of salary increases have caused State employee compensation to fall significantly
behind the market. Further, when coupled with inflation, lack of salary increases have
served to decrease employees' purchasing power.
Salaries la- g behind market - According to the Joint Governmental Salary Survey
conducted by the Personnel Division, the average State employee salary is 22.5 percent
behind the average market salary as of July 1, 1992.' For some positions the gap is
even greater -- electricians and physical therapists are 29 percent behind market. The
market lag grew quickly during a four- year period in which there were few or no
increases in State employee salaries, while there were approximately 3 to 5 percent
annual increases in the market salaries.
Real income has decreased - The lack of salary increases in recent years is having a
major impact on employees' purchasing power. Due to the effects of inflation, real
income has decreased for State employees. Over the last five years, inflation has risen
almost 16 percent, while State employee salaries rose only 3.1 percent. The cumulative
1. The methodology utlllzed In the Jolnt Governmental Salary Survey, and ~ tcso nclusions, were recently
vd1ldatt. d In consultant's analysls for the Governor's Offlce of Excellence In Government.
effect of this gap is that real income for the average State employee decreased by
$ 2,436 from fiscal year 1988- 89 to fiscal year 1992- 93'.
Although commonly held that the level of benefits State employees receive compensate
for the difference in salary, this is not the case. Recently, Coopers and Lybrand
performed an analysis of the Joint Governmental Salary Survey and found that
benefits do not bridge the 22.5 percent pay gap. The study noted that an employee
whose salary alone is 20 percent behind the market is still 17.8 percent lower than
market when benefits are included.
Low Salaries Impact
Recruitment And Retention
Low salaries have impacted the State's efforts to recruit and retain qualified
employees; however, efforts to address salary issues have been fragmented.
Low salaries hamper recruitment and retention - Low State salaries have hampered
recruitment efforts for many positions. A review of current literature on compensation
shows that employers who consistently pay salaries lower than the market rate will
have a difficult time attracting a sufficient number of qualified people. In fact, when
asked what factors prevented the hiring of qualified people, hiring supervisors we
surveyed cited low salaries more than any other factor. Further, our panel of agency
Personnel representatives listed low salaries as a significant problem hampering their
efforts to attract and employ quality individuals.
The lack of competitive State salaries also contributes to problems in retaining
employees. According to current compensation literature, when pay is below market,
an employer will not be able to retain people no matter what other retention efforts
are made, and turnover will tend to increase. The hiring supervisors on our panel
indicated that this holds true for the State in that the low salaries are causing
problems with employee retention. In fact, two State agencies whch conduct exit
interviews found that over 50 percent of the respondents left State service due to low
salary. Turnover is quite costly for the State -- current literature suggests that turnover
costs can run as high as $ 5,000 per position filled. This figure includes not only the
cost of recruitment efforts to refill the vacant positions, but also the cost to train new
employees, and the productivity lost due to the vacancies.
Fra- g nzerzted approach used to address problems - In recent years, a piecemeal effort
has been made to increase State employee salaries, resulting in fragmentation of the
compensation system. State agencies have pursued a number of avenues in an effort
1. The impact of inflation on the average State employee's income was calculated using the average
metro Phoenix Consumer Price Index ( CPI) for each fiscal year from 1988- 89 to 1992- 93 ( provided
by the center for Business Research, Arizona State University).
to obtain salary increases for their employees. Typical methods used to increase pay
for particular individuals or positions include:
SPECIAALP PROPRIATIO- N ASg encies have lobbied the Legislature for additional
salary monies. Some agencies, such as the Department of Corrections and the
Department of Public Safety, have been successful in obtaining additional monies
for salary increases.
SPECIALR ECRUITMENRTA TES- Some agencies facing recruitment problems are
granted permission by DOA to offer a starting salary above the minimum in the
salary range.' Use of special recruitment rates is not uncommon , and they are
used for 144 classes in the State service, or just over 9 percent of all classes.
However, this practice causes salary compression by bringing newer employees
in at rates near or above existing employees.
RECLASSIFICATIO- NBSas ed on special requests prepared by agencies, DOA will
review specific positions to determine whether the position should be reclassified
to a higher grade level. During 1992, agencies received DOA approval to
reclassify over 1,600 positions ( or 5 percent of all State employees).
VOLUNTARGYR ADED ECREASE- AS gencies are able to obtain pay increases for some
employees by manipulating two Personnel rules. First, the employee takes a
voluntary grade decrease and in most cases, retains his/ her former salary per
Personnel rules. Then, the employee is promoted back to his/ her original grade
and receives the mandatory 5 percent increase in pay required by the Personnel
rules. Because these actions are not tracked, we were unable to determine the
frequency of such occurrences; however, DOA officials indicated that this practice
is not uncommon.
While State agencies may be successful in increasing salaries for particular individuals
or classes, the overall salary problems continue. Further, such approaches to salary
increases cause inequities between similar positions in other departments and agencies.
DOA Should Provide Decision Makers
With Information And Options
While DOA has been charged with providing salary recommendations, its
recommendations are of limited value. DOA's recommendations are based on available
funding rather than the results of its analysis. For DOA to have a meaningful impact
1. Personnel rules mandate that new hlres must be compensated at the entrance rate for the pay grade
for the posltlon, unless a speclal recruitment rate is authorized by Personnel.
on compensation decisions, it needs to provide the Governor and Legislature with
timely, objective, and comprehensive reports detailing various alternatives.
DOA should provide independent recommendation - Currently, the DOA Director is
required by statute to " make an annual recommendation to Legislature and the Joint
Legislative Budget Committee of a salary plan and adjustments to the plan for employees in
the State service ... on m befare January 1 of each year."
In reality, the DOA Director's annual recommendation is guided by the executive
budget proposal, rather than the salary plan adjustments needed to maintain an
adequate compensation system. The DOA Director stated that the annual
recommendation is a political document and as an appointee of the Governor, his
recommendat,. ,) n should be consistent with the Governor's budget. Therefore, recent
annual recommendations have been made based on the budget monies available. The
link to the budget is so great that DOA even sought to have their reporting date
changed from December 1 to the current January 1, in order to coincide with the
release of the Governor's budget.
For a meaningful recommendation to be made, DOA needs to change both the nature
and timing of its recommendation. As the State's compensation professionals, DOA
should be providing decision makers with complete and objective information on the
compensation of State employees. If DOA does not provide this information, there is
no one else who will do so. Further, the compensation information should be provided
before budget documents are compiled and decisions regarding budget priorities are
made. Ths would allow both the Governor and the Legislature to consider all the
needed information, and then allow the political process to determine whether salary
issues will become a budget priority.
DOA should provide more comprehensive information - While DOA provides the
Legislature with salary information in its annual recommendation, it is limited to the
results of its annual salary survey. The report includes only the percentage by which
State salaries lag behind the market in six broad categories.
Other states provide much more comprehensive information in their compensation
reports. These reports include analysis on average pay levels, market comparisons, and
other useful information. Some examples of the types of information other states
compile include:
Specific compensation information, such as employee distribution by grade,
average annual salary, amount of sick and annual leave accumulated, cost of
leave taken per employee, and the cost of overtime
Comparisons with other states, such as rank in average state salary and rank in
state employees per population
w Trends, such as average salary differences over the last five years and the cost
of leave taken over last ten years
DOA should present alternatives - To further improve the annual salary
recommendation, DOA should present alternative solutions based on analysis of the
salary plan. For the recommendation to be effective, each alternative should be
presented clearly, with a discussion of the compensation problem it is intended to
solve, how this alternative will work to solve it, and what the effects will be. For
example, DOA could present alternatives for across- the- board salary increases,
increases that target groups experiencing high turnover, or increases that target groups
whose salaries are farthest from the market. In addition, it could provide varying
funding choices such as a specific percentage salary adjustment, a fixed- dollar general
salary adjustment, or a particular percentage merit increase, and discuss the effects of
each. At a minimum, DOA should provide the following information for each
alternative:
w Description of the alternative,
w Advantages and disadvantages,
w Suggested priority order for actions to be taken,
w Suggested implementation strategy,
w Cost impact,
w Employees affected, and
w Other analysis or information useful to decision makers.
RECOMMENDATIONS
1. The Legislature should consider amending A. R. S. 541- 763.5 to require that the
annual salary recommendation be made to the Governor and the Legislature by
early fall of each year, and that the recommendation include alternative
approaches to compensation issues, in order to address the State's compensation
problems.
2. DOA should prepare recommended salary adjustments based on the results of
its analysis and allow policymakers to determine whether the salary issues will
become budget priorities.
FINDING IV
DOA NEEDS TO MORE PROACTIVELY
MANAGE ITS EMPLOYEE HEALTH CARE
BENEFITS PROGRAM
The Department of Administration's Personnel Division needs to more proactively
manage State employee health insurance benefits. In early 1992, in an effort to prevent
significant premium increases to the State, the Division made several controversial
decisions. These decisions, however, increased costs and/ or reduced services to both
State employees and retirees. To prevent similar problems from occurring in the
future, the Personnel Division needs to ensure that State employees' health care needs
are defined in conjunction with the Legislature and State employees, that usage is
monitored, and that its Request for Proposals is specific. Further, whenever a new
contract award is made, DOA needs to ensure that employees are adequately notified,
and that carrier performance is monitored.
Decisions Made To Contain
Costs Result In Controversy
In an effort to thwart an increase in health care costs, DOA made several controversial
decisions. These decisions resulted in reduced services and increased out- of- pocket
costs for a number of State eri, yloyees and retirees. Due to considerable pressure from
many sources, the Division has made some changes to specifically address these
problems; however, their cause has not been addressed.
Decisions made to avoid cost increases - In 1992, the Personnel Division received a
proposed premium increase of over 26 percent from its health insurance carriers. The
Division projected that the premium increases would cost the State an additional $ 44
million per year. However, the Governor mandated that there be no increase in State
funding for employee health insurance. After weeks of negotiations with the insurance
carriers, the Division determined that they had reached an impasse.
In an effort to prevent an increase in State health insurance premiums, the Division
made several controversial decisions. First, the Division decided to place the health
insurance contracts out to bid, rather than continue the current contracts, although
there was very little time to complete the bidding process. In addition, the Division
changed the way bids were requested to separate the more expensive groups, retirees
and rural employees, from the general risk pool ( to discontinue subsidizing of these
groups by urban State employees). The Division also allowed the carriers to define the
coverage they would provide, rather than the Division explicitly indicating the State's
needs. Finally, the Division selected a cost- sharing strategy whereby the State
contributes an equal amount toward premium costs for each employee located in a
given geographic region, rather than contributing more toward the more expensive
plans. While these decisions did result in savings to the State, employees and retirees
suffered the following consequences:
Because the counties were bid individually, insurance plans offered different
coverage for rural and urban employees. While HMO coverage had been
previously available in most counties, in many rural counties HMO coverage was
either eliminated or altered such that it was no longer a viable option. Many
State employees in rural communities found that while HMO coverage was
available, their community either lacked providers and/ or a participating hospital.
Further, urban employees were no longer offered an indemnity plan.
Retirees, rural employees, and those urban employees enrolled in non- HMO plans
were faced with huge out- of- pocket increases. Some retirees saw premium
increases of over 50 percent ( from $ 485 to $ 757 per month for family coverage).
Further, some rural State employees were offered only indemnity coverage and
were faced with paying up to $ 1,250 per person or $ 2,500 per family in
out- of- pocket expenditures.
Some employee populations were left without coverage for their medical
conditions, although they had coverage under past plans. For example, a prior
plan had covered durable medical equipment and diabetic supplies, and the new
plan limited coverage for some of these items. In other instances, medical
conditions were covered, but at a much greater cost. For example, hospice and
home care which had previously been available through the indemnity program
at 80/ 20 and no limits was limited to 70/ 30 coverage, M ith a $ 7,500 maximum.
Employees in rural areas of the State reported that they were unable to find
providers. In some instances, the employees found that providers listed in the
directory were not accepting new patients.
Because new carriers were added and these new carriers had a short lead time
to begin providing service, employees received inadequate service from the
carriers at the beginning of the plan year. Claim payments were delayed for over
two months by one carrier, and some employees did not receive plan information
or identification cards from two carriers for several months.
Division took action to reduce burden on etnuloz/ ees - After receiving pressure from
employee groups, legislators, the media, and an employee petition drive, the Division
made some changes to the medical plans to address employees' concerns over
coverage and cost. The Division added coverage for conditions that had been omitted
under the new plans and decreased deductibles and out- of- pocket costs for employees
living in the rural areas. The Division also encouraged the development of HMOs in
some of the rural areas to provide plans with lower employee costs. Although these
actions reduced some of the employees' financial burdens, they do not address the
problems' causes.
Number Of Actions Needed
To Avert Future Problems
DOA needs to take a number of steps to prevent similar problems from occurring in
the future. DOA needs to work with legislators and employees to define the State's
health care needs and goals. Further, DOA needs to monitor health care utilization to
prevent " surprise" increases. Finally, when DOA does go to bid, it needs to ensure that
its Request for Proposal ( RFP) is as specific as possible.
Division must define the health care program with irrput from concerned parties -
Because key policy questions regarding the State's health care program remain
controversial, decisions need to be made regarding what coverages should be
provided. For example:
What types of health care plans should be offered ( i. e. HMOs, Indemnity, PPOs)?
Should coverages and costs vary between urban and rural employees?
Who should be covered ( i. e. retirees and current employees)?
What level of coverage should be provided?
How should costs be allocated between the State and its employees ( i. e. equal
contribution for each employee versus greater subsidizing of the more expensive
plans)?
Should the current contracts be renewed or rebid?
In defining State health care program needs and goals, DOA needs to work in
conjunction with the Legislature. In procuring the health insurance programs in 1992,
the Division excluded legislators from its decision making process. Not only did the
exclusion result in less- than- desirable coverage for employees and retirees, it
eliminated the Legislature's ability to take action to avert the problem. For example,
during a legislative meeting, a legklator indicated that had the Legislature been aware
of the increasing cost of the former health care plans, it may have elected to continue
those plans by funding the premium increase, instead of offering an employee raise.
Further, legislators noted that the decision to separate retirees from the rating pool
drastically impacted their policy to offer early retirement packages to employees.'
Further, because decisions so strongly impact employees, efforts should be made to
ensure that employee interests are considered and to identify potential problems.
Other states, as well as other Arizona employers we contacted, indicated that they use
employee focus groups, surveys, and committees when planning benefits programs.
Division does not monitor claims experiences - As described previously, the Division
was surprised by the large increases proposed for renewing their contracts in 1992 and
this was due, in part, to a lack of utilization data. Utilization data is critical in
allowing the Division to know how much carriers are expending for claims, and
whether premium increases may be warranted during contract negotiations. Although
the State's provider contracts require monthly, quarterly, and annual utilization reports,
the Division has not ensured that all carriers have submitted these reports on a
consistent basis. In addition, when information is received, it is often untimely,
incomplete, and unreliable.
Our panel of benefits managers indicated that employers must push the carriers into
providing data on how health care dollars are being spent. Without obtaining this
information, the Division cannot monitor and evaluate the services carriers are
providing or determine what medical services the State is paying for.
REP needs to be specific - Contrary to its 1989 RFP, DOA's 1992 RFP was vague with
regard to the State's desired health coverage. According to DOA officials, the RFP was
intentionally left open so that the Department could identify the most cost- efficient
carriers in each area of the State. However, by not dictating what coverages it desired,
the State was left to choose from the various plans offered and varying benefit levels.
Thus, when the contracts were awarded, employees in various geographic regions had
varying plans and different benefit levels.
In the future, DOA should prepare a detailed request for bids specifying the coverage
desired for State employees. The RFP should detail the plan design and specify
deductibles and co- insurance levels. If the Division needs to explore alternative plans,
this can still be done in the RFP. The State of Kansas, for example, included several
questions for the carriers about options they were considering, after they had
presented the specific plan design. The RFP also allowed carriers to bid an alternate
plan in addition to those that were specified.
1. After being excluded in 1992 decisions, the Legislature enacted legislation in 1993 establishing the
Legislative Oversight Health Insurance Benefits Review Committee. The Committee has been charged
with reviewing some of the more controversial problems stemming from DOA's 1992 decisions,
including whether retirees should be regrouped with State employees, whether there are ways to
minimize the differences in coverages between rural and urban employees, and whether employees
who terminated coverage in the last six months of 1992 should be allowed to reenroll.
Additional Actions Needed
Once An Award Is Made
When DOA awards new contracts, it needs to ensure that employees have sufficient
information regarding coverage options on which to base their selection decisions.
Further, DOA needs to monitor carriers to ensure they are meeting contract
requirements.
Conzmunication re- g ardin- g coverage options is important - During the open enrollment
period in 1992 in which the new benefit plans were introduced, employees received
incomplete information regarding them. Although the State was adding new carriers
and eliminating coverages with others, employees could not determine from materials
provided what medical conditions would be covered. For example, employees enrolled
in one plan were not informed for several months that allergy shots were not covered
on an out- of- network basis. Further, although the State held meetings for employees
to learn about the new plans, carrier representatives were not present and the Division
representatives providing the information lacked specifics.
Other states use a variety of methods to distribute benefit information. For example,
Nevada produces a video presentation of the benefits plans to use at open enrollment
meetings and for new employee orientation. Ohio and Utah arrange a health benefits
fair at open enrollment where carrier representatives are on hand to answer questions
for employees.
Once employees select health plan options, DOA needs to ensure that they promptly
receive information regarding how and where to obtain medical services. In 1992,
employees enrolled in some programs did not receive users manuals until two months
after the date coverage began. Complaints were received that employees were
confused about where to go for treatment. This was especially problematic for those
enrollees who experienced medical emergencies.
Divisiosz needs to nzonitor carrier performance - The Division should monitor the
carrier's performance to ensure employees are receiving adequate service. The Division
has set several performance standards for the carriers in the contract. For example,
carriers are required to pay 90 percent of claims within 14 calendar days of receipt,
achieve a payment processing accuracy rate of 95 percent, and have a 75 percent
satisfaction rate. The contract also allows monetary penalties for failure to meet these
standards on a quarterly basis.
Although empowered by the contract to monitor performance, the Division has failed
to do so adequately. Without this monitoring, the State does not know if the carriers
are meeting the contract terms. Further, the State map not be collecting the penalties
to which it is likely entitled. For example, one carrier delayed some claims payments
well beyond the 14- dav standard for the first quarter of the plan year, however the
Division did not determine the extent of the delays, and thus does not know if the
State is entitled to a 5 percent reduction in the carrier's retention fees for the quarter.
RECOMMENDATIONS
1. In making major policy decisions, the Division should include employees and the
Legislature in the decision making process to help define goals for the health
insurance plans.
2. The Division should establish the design of the health insurance plans prior to
beginning the procurement process, and include the specifics of the plan design
in the RFP.
3. The Division should improve communications with employees on the benefits
programs.
4. The Division must work to obtain utilization information from the carriers and
use this information to project potential carrier premium increases and determine
their validity.
5. The Division must monitor the health insurance program and evaluate the
insurance carriers for achievement of performance standards, assessing the
contractual penalties for nonperformance.
FINDING V
THE DIVISION SHOULD IMPLEMENT MECHANISMS
TO CURB ESCALATING
HEALTH CARE BENEFIT COSTS
Soaring health insurance costs have forced governments and private companies across
the nation to seek control over further increases. Arizona's cost to provide its
employees' health benefits has risen to $ 168 million, with additional increases on the
horizon. While the Personnel Division has taken some steps to curb costs, it should
consider implementing additional cost containment measures utilized in other states
and private industry. In addition, it should monitor health care expenditures to target
costly areas.
Health Benefit Costs
Rapidly Rising At The
National And State Levels
Nationally, the cost of health care is increasing at a rapid rate. Currently, the medical
inflation rate is outpacing the Consumer Price Index and insurers are predicting that
the cost for the typical medical plan will increase 20 to 25 percent per year. In fact,
studies predict that by the year 2000, employers will need to spend over $ 20,000 per
employee each year to provide traditional health insurance plans1. Benefits literature
attributes the increasing costs to medical inflation, technological changes, and use of
costly medical treatments.
In line with national trends, Arizona has also experienced dramatic increases in its
health insurance, costs, with future increases predicted. Between fiscal year 1989- 90 and
1991- 92, the State's contribution toward employee benefits rose almost 35 percent ( from
$ 101 million to $ 135 million). Over this same period, the average premium cost paid
by Arizona per employee rose from approximately $ 2,400 to $ 3,000 ( 25 percent
increase). For fiscal year 1993- 94, the program will experience a cost increase of 5.9
percent overall, with one plan increasing by over 15 percent. One Arizona carrier
projects health care cost increases to be about 14 percent per year. Even if cost
increases were kept to 10 percent annually, the State would be expending over $ 200
million within 5 years.
1. H~ gginA~., F ., " Yes, Companies Cdn Cut Health Costs," Fortune Magazine, July 1, 1991, p. 52.
Rlmler, G. W., " Mdndged Care: the Solution or the Problem?," Benefits Revlew, May- June 1992, p.
39.
The Division Should Consider
Aggressive Cost
Containment Measures
Although increases in health care insurance are likely to continue, the Personnel
Division should consider implementing measures taken by other states and private
companies to lessen the extent of the increases. The Division has made some efforts
to curb its costs, yet additional efforts should be considered. " Carve out" programs
could be instituted to reduce the cost of mental health and drug programs. In
addition, implementing a wellness program and conducting eligibility audits could
lessen utilization of health insurance.
A variety of sources were utilized to identify commonly used cost containment
measures. We conducted an extensive literature search of over 100 current benefits
articles. In addition, we surveyed seven other states regarding their programs.'
Further, we interviewed human resources and benefits professionals representing
several major Arizona employers and held a panel discussion with a group of these
professionals. 2
From this research, we discovered a variety of cost containment measures currently
in place within other organizations. While the Personnel Division is already utilizing
some measures, such as the use of less costly managed health care plans ( i. e. HMOs
versus indemnity plans), we identified other measures which DOA should consider
implementing to curb cost increases. These measures are presented as follows.
" Came out" of mental health and prescription drug programs - Under Arizona's
current health benefit plans, all health care services are provided by the plan
providers. However, a number of Arizona employers and other State officials we
interviewed indicated that they have revised their plans to essentially " carve out" some
of their more costly services, including mental health and prescription drug programs.
These programs are then separately contracted and managed.
Managed mental health/ substance abuse programs could be an effective mechanism
to manage both costs and the care provided. Two of the larger Arizona employers we
interviewed indicated that they had implemented this type of program and had
positive feedback from employees; both felt that employees were receiving better care
than had been previously provided. Several other states, including New York and
Ohio, had also implemented managed mental health/ substance abuse programs.
1. We selected the states in our survey based on geographic location ( Utah, Nevada, and Colorado), a
similar covered employee population to Arizona ( Ohio and Kansas), and recognition in the literature
for having successful cost containment programs ( New York and Illinois).
2 Our panel cons~ sted of human resource and benef~ ts profess~ ondls from Salt River Project, Arizona
Publlc Strvlce, McDonncll Douglas, Honeywell, and the Clty of Phoen~ x.
Managed prescription drug programs are another means of providing better cost
control. Prescription drugs generally account for about 15 percent of an employer's
expenditure for health care, and the cost of drugs is rising at over 20 percent annually.
Some employers separately manage prescription drug programs and encourage the use
of less costly prescription drugs through techniques such as generic substitution,
differing copayments for brand name and generic drugs, use of a mail- order service,
and use of a formulary ( a predetermined set of cost- effective drugs).
Comvrehensive wellness vrogram - Studies indicate that wellness programs can be an
effective means of reducing utilization of medical plans through developing a healthier
workforce. Wellness programs typically include employee health screenings to
determine areas of health risk, educational programs aimed at educating employees
in health risk areas identified in health screenings, and follow- up screenings and
counseling to measure progress toward wellness goals. Further, some wellness
programs provide incentives to employees to encourage them to participate.
Although it is difficult to measure the dollars saved by wellness programs, there are
some compelling reasons for implementing them. Lifestyle- related illnesses are costly;
in fact, lifestyle- related costs are estimated to account for 55 percent of all health care
costs. One study indicated that employees who smoke or drink excessively, or who
are overweight, cost employers up to $ 900 per employee in excess costs per year.
Employers with comprehensive programs have experienced lower health care costs and
reaped additional savings from reduced absenteeism and turnover.
The Legislature, recognizing the value of wellness programs, passed legislation in 1990
requiring DOA to implement such a program. Further, funding for wellness programs
is available through the Special Employee Health Insurance Trust ~ und.' In spite of
the legislation and funding, the Personnel Division has developed a very limited
program consisting of a library of material for employees to use, distribution of a
wellness/ benefits newsletter, and offering of wellness classes. In fact, for fiscal year
1992- 93 the Division budgeted over $ 380,000 for wellness programs; however, as of
May 31, 1993, they have spent less than $ 34,000 for wellness activities.
Itrzvlementation of measures to eliminate ineligible dependents - Another means of
decreasing utilization of health insurance is by eliminating coverage for ineligible
dependents. Although enrolling ineligible dependents on insurance plans is a common
form of employee fraud, the Personnel Division does not have adequate mechanisms
in place to prevent or detect such occurrences. Prior to enrolling dependents, the
Division should require proof of eligibility. Currently, the Division limits its screening
efforts to a review of the enrollment application for inconsistencies ( such as children
with last names different from the employee's). Some other employers require
1. The Spec141 Employee Health Insurance Trust Fund was established by A. R. S. $ 38- 654 for use in
administering the State employee health insurance monies. These monies are collected from employer
and employee premlum contr~ butions and can be expended for health insurance premiums, cldlms
costs, administration, and pldn improvements. As of May 31, 1993, the Fund had a balance of over
$ 1 mill~ on available for wellness programs
employees enrolling dependents to provide supporting documentation, such as a
marriage license or a birth certificate.
In addition, the Division should consider conducting eligibility audits to identify
ineligible dependents who are already enrolled. The City of Chicago, for example,
conducted a year- long investigation which resulted in letters being sent to 1,988
employees questioning the eligibility of their 3,228 dependents ( the City had 130,000
employees, dependents, and retirees). The investigative report showed that there was
gross abuse of the City's health care benefits, including the carrying of ex- employees
who were no longer paying, and employees enrolling ineligible grandchildren and
college- age children.
Finally, the Division should develop a policy which includes penalties to deter
employees from enrolling ineligible dependents. Currently, Arizona has no such
penalty. The Division should establish a policy on handling employees who commit
enrollment fraud, and communicate it so that it is well known. Two of our panel
members indicated that it is their companies' policy that enrollment fraud is grounds
for termination. In addition, one of our panel members indicated that during open
enrollment, employees are given an " amnesty period" whereby they are provided with
clear notice as to which dependents are eligible, and then given the opportunity to
drop those who are not.
Personnel Division Needs To
Monitor Costs To Effectively
Target Its Cost Containment Efforts
For the Division to implement effective cost containment measures, it needs to obtain
comprehensive and accurate expenditure data from the carriers. Expenditure
information is critical for determining actions needed as well as monitoring the impact
of actions taken.
Necessrrn/ infomation lacking - While the Personnel Division receives expenditure
reports from its three carriers, the data does not allow the Division to adequately
analyze cost containment options. We reviewed the expenditure report submitted by
one of the carriers for the period of August 1 through October 31, 1992, and found
that the carrier listed a majority of claims paid as " unknown," and thus did not
indicate the types of services rendered. Without this information, the Division is
limited in its ability to determine what cost containment actions are warranted.
Part of the Division's problem in obtaining reliable data may stem from its failure to
require such information. The Division's contracts clearly indicate that it is entitled to
expenditure information from the carriers. While it has received information, it has,
to our knowledge, not attempted to force the carriers to submit complete and reliable
information. Further, we saw no evidence that the Division attempts to use the
information to routinely perform any analyses of its expenditures.
Cost containment efforts should be tarxeted and measured - Lack of comprehensive
expenditure information limits the Division's ability to identify needed cost contain-ment
measures. Expenditure information is critical to determining areas with high
expenditures, or problematic areas needing attention. This information should be used
in designing the State's wellness program and in modifying the design of the health
care plan. Other employers have used cost information to target their efforts to control
costs; for example:
One of our panel members commented that in reviewing trends in his company's
utilization data, he found that prescription drug expenditures were high, which
then triggered a decision to address this area through a carve- out from their
existing plans.
Another panel participant noted that reviewing the top ten expenses for his
company's health insurance program impacts what is offered through the
company's wellness program. For example, if premature babies are a top expense,
then prenatal care may be added to the wellness program.
A university in New York established a committee to identify potential cost
containment areas. The committee analyzed the employee population's health care
cost demographics and trends, and conducted a specific utilization analysis of the
health plans. As a result of its analysis, numerous changes were made. For
example, the indemnity plan was revised to make it easier and less expensive for
patients to seek mental health care on an outpatient basis. Further, the university
offered an incentive program ( cash payments of $ 300 to $ 500 per year) to
encourage employees to use their spouses' health benefits rather than the
university's plans. In addition, the wellness program was revised to offer
programs designed to address problems found during their health screenings.
Comprehensive expenditure information is also necessary to evaluate the effectiveness
of cost containment measures that are taken and to identify areas where further efforts
are needed. The Division needs to have information available on the utilization
expenditures of the health plans both before and after implementing cost containment
measures to allow evaluation of their impact. For example, a New York university
evaluation committee began with techniques that it later realized had limited value,
such as adjusting premiums to shift more costs to employees. By studying the impact
of its changes, the committee was able to evaluate its actions, and then make
additional changes to modify its efforts.
RECOMMENDATIONS
1. The Division should consider implementing cost containment techniques used by
other employers, including carving out of the mental health or prescription drug
programs, developing a comprehensive wellness program, and conducting
eligibility audits.
2. The Division should obtain adequate expenditure data on the health plans in
order to target and measure the effectiveness of cost containment efforts.
3. The Division should develop a policy regarding enrollment fraud, and make the
policy widely known to employees to deter its occurrence.
I Fife Symington
Governo!
J. ELLIOTT HIBBS
D~ rector
ARIZONA DEPARTMENT OF ADMINISTRATION
PERSONNEL DIVISION
1831 WEST JEFFERSON . PHOENIX, ARIZONA 85007
October 6, 1993
Douglas R. Norton
Auditor General
2910 N. 44th Street, Suite 410
Phoenix, Arizona 85013
Dear Mr. Norton:
Enclosed are our comments on the revised sunset report of the
Personnel Division.
We wish to thank you for the cooperation your sunset team
exhibited in developing the sunset report. The Personnel ~ ivision
is appreciative of the efforts made by the team to understand the
complexities of the State's personnel system.
Please do not hesitate to contact us if you have any
questions.
Sincerely,
G/ J. Elliott Hibbs
Director
tdilliam Bell
Assistant Director
for Personnel
JEH : WB/ crs
Enclosure
SUMMARY
The Department of Administration believes that the recommendations in the audit report
represent the customer oriented direction defined in the Department's vision and mission
adopted in November 1992. We, therefore, generally support the directions outlined.
The performance audit encompassed the Personnel Division's three primary service areas,
Employee Health Benefits Programs, Employment, and Classification/ Compensation. The
Division actively supports many of the recommendations contained in the report. Several
improvements not noted in the audit already have occurred, while others are under development,
with final implementation in some cases subject to funding approval.
Approximately two years ago, the newly appointed personnel director and his
management team embarked upon preliminary review of the service delivery and processes
performed by the Personnel Division. This review led to the conclusion that major reforms and
process modifications would be necessary before the Division would be able to proactively
address the existing deficiencies. For example, before any consideration relative to making
a transition to division- wide automation could begin, the entire building had to be rewired; the
antiquated employment system that was being used needed to be replaced; user friendly,
customer oriented service delivery processes needed to be encouraged and developed. A final
five- year strategic plan to create a modem, state- of- the- art personnel system will be completed
shortly. This will guide efforts to streamline the system in coming years.
Significant strides already have been made to enhance existing processes, and
more aggressive approaches are being developed for implementation with available resources.
These are identified in our response to each of the findings and recommendations as appropriate.
Finding I: The state needs to redesign its outmoded hiring system.
Recommendation 1: DOA Personnel should begin a comprehensive reform of the State hiring
system, including shifting Personnel's role from rule enforcement to service; reviewing statutes
and preparing recommendations for the Legislature; and redrafting the Personnel Rules.
Response: The Division began to design and champion an optimum statewide hiring process
in cooperation with the Governor's Office of Excellence in December of 1992. Three pilot
projects to assist in the implementation of this optimum hiring process are ongoing, with start
up of the new system projected to occur in early 1994.
The first pilot is a proactive partnering project involving five agencies and the Personnel
Division. Through the use of charters signed between an agency and the Personnel Division,
DOA will decentralize components of the hiring process by delegating to the agency those
components agreed to in the charters. The Personnel Division will house Human Resource
experts who will provide advice, guidance, technical information and training as requested, and
serve in a consultative and professional administrative role.
The second project under development will introduce a change in the processing of
applications and agency requisitions to fill vacant positions. A state- of- the- art software program
that scans resumes through artificial intelligence will be purchased. An applicant will use a
simplified application as a cover sheet to a resume; one application/ resume for any job in State
Service will be used; for some jobs a supplemental form will be used instead of a resume.
Agency supervisors will be able to electronically submit a requisition and initiate a paperless
transaction. Based on criteria established by a hiring supervisor in cooperation with a personnel
professional, a new software program can automatically review all available resumes and general
a short list of candidates who meet the criteria.
The third project will be an automated link between a Department of Economic Security
Job Service Office and the Personnel Division to establish on- line job information and
application processing. The Job Service Office will have updated information on jobs and
vacancies in State Service. Applications1 resumes will be directly scanned into the Personnel
Division's candidate pool and matched to any unfilled requisition.
To address necessary revisions to the Personnel Rules as a result of the new process to
be implemented, a task team is reviewing the statutes and rules applicable to State Service
employment.
Recommendation 2: Zn the meantime, Personnel should relax operating practices and rules to
increase service to, and participation of, State agencies in the hiring process. Particularly,
Personnel should allow: the design of supplemental applications by agencies; an expedient
method to update inappropriate job qualifications; maximum supervisor participation in
candidate evaluation; correction of candidate scores; access to additional candidate names;
prompt purging of names from registers; and targeted recruiting at colleges or job fairs.
Response: We concur with this recommendation to facilitate and enhance agency involvement
in the hiring process and have welcomed such participation in the past. To further improve the
quality of service, we have taken steps to encourage agency participation by:
- Continuing agency involvement in the development of recruitment supplements. In the
past two years, supplements for fifteen classifications have been developed with the
assistance of agency subject matter experts.
- Deriving job qualifications from up- dated PDQs rather than from the class specifications.
- Inviting hiring supervisors to participate in the evaluation of applications.
- Directing analysts to expedite the current process when candidate score correction is
warranted.
- Inviting hiring supervisors to review a register prior to a hiring list being issued; or,
when register review indicates need, placing additional names on the hiring list.
- Raising the priority of purging names from registers.
- Encouraging agency collaboration with the Personnel Division at colleges and job fairs.
Finding II: DOA needs to address fundamental problems with the State's classification
system.
Recommendation 1: DOA should develop a plan to establish the fiture purpose and direction of
the state's classijication system. This plan should include: what State government hopes to
achieve from it's classijication system; the strategies to reach these goals, including the most
appropriate framework and method of job evaluation; and an approach to obtain legislative
support for the need to maintain and enhance the classflcation system.
Response: In early 1992 the Governor's Office of Excellence recommended the formation of a
Position Correlation Studies Task Group made up of Coopers & Lybrand and Personnel Division
staff. This group noted many of the same concerns with the current method of classification that
were identified in this performance audit, i. e., it is too subjective; is slow and lacking in
responsiveness; is not universally understood or applied; is easily manipulated; uses internally
inconsistent- job matching; and is labor intensive. Identification of the concerns changed the
project focus from updating and improving the current classification system to recommending
a new job evaluation system, which would be the basis for a new classification system.
The Position Correlation Studies Group generally agreed that all classification systems
have strong and weak points, but a point factor method of job evaluation would address many
of the current concerns with the existing system.
The Position Correlation Studies Group used current state job classifications to test the
recommended point factor system, the Oliver System, before Coopers & Lybrand made their
final report and recommendation to the DOA Director in September 1993. Coopers & Lybrand
also recommended that the new classification system be implemented in concert with an
aggressive salary administration plan in order for it to be effective. The DOA Personnel
Division has strongly emphasized the need to address salary/ compensation problems in order to
maintain or implement any sound classification system. The Coopers & Lybrand
recommendation, as well as the Performance Audit Recommendation, reiterate that no
classification system will be effective until salary issues are addressed.
The Department supports the recommendation and will develop an approach to obtain
necessary legislative support to establish, maintain and enhance the classification system.
Finding 111: DOA should improve efforts to inform decision makers on salary issues.
Recommendation I: The Legislature should consider amending A. R. S. 41 - 763.5 to require that
the annual salary recommendation be made to the Governor and the Legislature by early fall of
each year, and that the recommendation include alternative approaches to compensation issues,
in order to address the State's compensation problems.
and
Recommendation 2: DOA should prepare recommended salary adjustments based on the results
of its analysis and allow policymakers to determine whether the salary issues will become budget
priorities.
Response: Budget and salary recommendations are inextricably intertwined. The Legislature
receives the Joint Governmental Salary Survey as soon as it is printed, usually six to eight weeks
prior to the annual recommendation. In the annual recommendation, the Department always
identifies the existing salary gap between the State and other employers, consistently advocates
for competitive salaries and urges that the gap be narrowed. We have offered alternative options
for addressing inequities; however, no specific proposals can be offered without considering the
ability to fund the proposal.
If the Legislature moves forward the date for the Annual Recommendation, the DOA will
adjust the Joint Governmental Salary Survey schedule as necessary in order to comply with
legislative requirements. The customary advance distribution of the survey results to the
Legislature and survey participants shall continue. The Personnel Division is currently
reviewing alternatives to collect, analyze, and prepare for publication the Joint Governmental
Salary Survey in an abbreviated time period. It is anticipated that this effort will streamline the
process.
Finding IV: DOA needs to more proactively manage its employee health care benefits
program.
Recommendation I: In making major policy decisions, the Division should include employees and
legislature in the decision making process to help define goals for the health insurance plans.
Response: The Department will be working closely with the Benefits Oversight Committee, a
legislative group established last session. Additionally, the Division has established the
Employees' Benefits Advisory Committee, an employee focus group. This body of 28 employee
members ( nominated by their respective agencies) will meet bi- monthly to discuss employee
benefits. The partnership between the Division and these two committees will provide a solid
forum for obtaining suggestions for benefit changes as well as to obtain feedback on potential
changes the Department may consider.
Recommendation 2: The Division should establish the design of the health insurance plans prior
to beginning the procurement process, and include the specijics of the plan design in the RFP.
Response: The Division agrees with the concept of the recommendation, but supports retention
of flexibility in an RFP to allow bidders to propose potentially innovative alternatives and/ or
viable design recommendations. The Division is currently in the process of developing a survey
of the major employers in Arizona for use in future RFP development. In this manner, the
competitiveness of the State's benefits plans will be maintained.
Recommendation 3: The Division should improve communications with employees on the benefits
programs.
Response: The Division agrees that communication is extremely important to the success of the
benefits plans. Since January 1993, the monthly newsletter " For Your Health and Benefits" has
been published and distributed to all employees. In addition to the regularly scheduled meetings
that are held throughout the state during each Open Enrollment period, the Benefits Section
implemented the " On the Road" program. This entailed monthly visits to various locations to
provide personal interaction between employees, D. O. A. benefits professionals and the carriers.
These meetings have been well received and have provided an additional forum to address
employee concerns and provide education about benefits. The Division is also in the process
of producing personalized employee benefits statements to be delivered to employees in early
1994. The focus group identified in the response to Recommendation 1 is anticipated to serve
as an additional communications conduit to agencies and groups they represent.
Recommendation 4: The Division must work to obtain utilization information j? om the carriers
and use this information to project potential premium increases and determine their validity.
Response: The Division has proactively monitored available information since 1983. Meetings
have been held with the carriers to facilitate the development of relevant reports. Analysis of
utilization data is used as an integral component in the RFP process. While we initially
experienced difficulties due to transition, all carrier utilization reports currently are meeting the
reporting requirements on a timely basis.
Recommendation 5: The Division must monitor the health insurance program and evaluate the
insurance carriers for achievement ofpe fomance standards, assessing contractual penalties for
nonpe fomance.
Response: The Division does monitor the receipt and validity of performance reports. An audit
of the carriers was requested in the Spring of 1993 to validate these reports. Penalties will be
assessed for nonperformance, as appropriate. However, if there are extenuating circumstances
beyond the carriers' control, there may be more appropriate means of resolving the issues.
Finding V: The Division should implement mechanisms to curb escalating health care
benefit costs.
Recommendation 1: The Division should consider implementing cost containment techniques used
by other employers, including carving out of mental health or prescription drug programs,
developing a comprehensive wellness program and conducting eligibility audits.
Response: The State has and will continue to implement cost containment techniques. It must
be considered, however, that many of those employers cited have done less to control costs to
date than the State has accomplished as an ongoing practice. Therefore, many of these programs
would be less useful for the State than they are for employers who have implemented them. For
example, the prescription programs currently in place offer as great a savings as would a stand-alone
plan. This is accomplished through the discounts negotiated by the carriers, the use of
generic drugs and formularies within the plans. Generally, carved- out mental health plans offer
a more comprehensive level of benefits than are available under current state plans. A study
performed by the Wyatt Company determined that the start up costs for implementation of a
carved- out mental health plan for the state would negate any potential savings. Additionally, the
State's wellness program is in the process of being further developed. Following the
development of a policy regarding eligibility enrollment fraud, eligibility audits will be
conducted.
Recommendation 2: The Division should obtain adequate expenditure data on the health plans
in order to target and measure the eflectiveness of cost containment eflorts.
Response: The Division continuously has utilized expenditure data to target cost containment
efforts and validate renewal requests. For example, in response to an analysis of the number
of low birth weight babies and associated complications, the Division has developed a
comprehensive prenatal care/ education program in conjunction with the State's carriers. Efforts
are ongoing to improve the quality of the data received from the carriers.
Recommendation 3: The Division should develop a policy regarding enrollment fraud and make
the policy widely known to employees to deter its occurrence.
Response: The Division agrees and is developing such a policy.

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PERFORMANCE AUDIT
DEPARTMENT OF ADMINISTRATION
Personnel Division
Report to the Arizona Legislature
By the Auditor General
October 1 993
93- 6
DOUGLAS R. NORTON, CPA
AUDITOR GENERAL
STATE OF ARIZONA
OFFICE OF THE
AUDITOR GENERAL
DEBRA K. DAVENPORT, CPA
OEPVTI AUOITOR TENERIL
October 14, 1993
Members of the Arizona Legislature
The Honorable Fife Symington, Governor
Mr. J. Elliott Hibbs, Director
Department of Administration
Transmitted herewith is a report of the Auditor General, A Performance Audit of the
Department of Administration, Personnel Division. This report is in response to a
December 13, 1991 resolution of the Joint Legislative Oversight Committee and is the
first of six audits scheduled on the Department.
To meet the needs of its users the Personnel Division must alter the manner in which
personnel services are provided. Our audit work found that in the most important
service areas - hring, classification, compensation, and benefits - Arizona's current
personnel system does not respond to its users' needs. The Federal Government and
many other state and local governments are examining or discarding personnel systems
that rely on extensive rules and restrictions and are building systems that offer the
flexibility and responsiveness needed to provide efficient, effective service.
My staff and I will be pleased to discuss or clarify items in the report.
Tlus report will be released to the public on October 15, 1993.
Sincerely,
DOU&& R. Norton
Auditor General
2910 NORTH 44TH STREET 1 SUITE 410 * PHOENIX, ARIZONA 85018 ( 602) 553- 0333 FAX ( 602) 553- 0051
SUMMARY
The Office of the Auditor General has conducted a performance audit and Sunset
Review of the Department of Administration, Personnel Division, pursuant to a
December 13, 1991, resolution of the Joint Legislative Oversight Committee. The audit
was conducted as part of the Sunset Review set forth in Arizona Revised Statutes
( A. R. S.) § § 41- 2951 through 41- 2957, and is the first of six audits scheduled on the
Department.
In order to meet the needs of its users, Arizona must significantly revise the manner in
which personnel services are provided. Our audit work found that in the most important
service areas -- luring, classification, compensation, and benefits -- Arizona's current
personnel system does not respond to its user's needs. The Federal Government and
many other state and local governments are examining or discarding personnel systems
that rely on extensive rules and restrictions in favor of systems offering the flexibility
and responsiveness needed to provide efficient, effective service.
The State Needs To Redesign
Its Outmoded Hiring System ( see pages 5 through 12)
Currently, Arizona's hiring system can deter the best candidates from entering State
service. The hiring lists provided by Personnel often contain unqualified or unavailable
candidates. Some hiring supervisors stated that it was often difficult to find even one
qualified, available applicant on lists submitted to them. In addition, the Division
requires agencies to follow policies that are often counterproductive to effective luring.
For example, we identified one case where a supervisor was required to offer an
interview to a candidate who did not speak English for a position that involved working
with the public.
A comprehensive reform effort is needed to change Arizona's hiring system to allow
agencies increased flexibility and service. Such reform will require revision of rules and
statutes that restrict agencies' hiring options. In addition, more immediate changes in the
Division's operating practices are also needed, including the use of supplemental
applications, increased participation of agency supervisors in candidate evaluations, and
recruiting at colleges and job fairs.
DOA Needs To Address Fundamental
Problems With The State's Classification System
( see pages 13 through 17)
Arizona's classification system is not being properly maintained or managed. While
positions should be reviewed periodically to ensure that job duties, qualifications, and
compensation are still appropriate, in the last 5 years, the Personnel Division has
conducted reviews of only 22 percent of the 1,500 classifications in State government.
According to DOA officials, regular classification reviews were discontinued because
there was not enough funding to implement salary upgrades which often result from
such reviews. However, failure to maintain the system hampers the State's recruitment
efforts, and results in inappropriate employee compensation. While DOA is considering
significant changes to the classification system, their efforts may be premature,
particularly until an assessment of needed changes is developed and funding issues are
addressed.
DOA Should Improve Efforts To
Inform Decision Makers On Salary Issues
( see pages 19 through 23)
Although State employees are an essential resource of State government, employee
salaries have not remained competitive. While State salaries were only 7 percent behind
the market in 1988, lack of salary increases has now widened the gap to over 22 percent.
As a result, State agencies have difficulty attracting and retaining high- quality
employees. While DOA is responsible for presenting salary recommendations to the
Legislature, it has based these recommendations on available funding rather than
presenting the results of its analysis to policymakers and allowing them to determine the
course of action. As the State's expert on compensation, DOA needs to provide the
Governor and Legislature with timely, objective, and comprehensive reports detailing
various alternatives.
DOA Needs To More Proactively Manage
Its Employee Health Benefits Program
( see pages 25 through 30)
The Personnel Division needs to more proactively manage State employee health care
insurance benefits. In 1992, in an effort to meet the Governor's demand that there be no
increases in State funding for employee health care insurance, the Division made several
controversial decisions. These decisions resulted in increased costs and/ or reduced
services for a number of current State employees and retirees alike. Further, the
decisions were made with little input from the Legislature or State employees. To
prevent similar problems from occurring in the future, the Personnel Division needs to
ensure the State's health care needs are defined in conjunction with the Legislature and
State employees; that usage is monitored; and that its Request for Proposals is specific.
Further, whenever a new contract is awarded, DOA needs to ensure that employees are
adequately notified, and that the carrier's performance is monitored.
DOA Should Implement Mechanisms To Curb
Escalating Health Care Benefit Costs
( see pages 31 through 36)
With State employee health benefits costing $ 168 million annually, and continuing to
rise, DOA needs to adopt measures to curb these costs. DOA should consider imple-menting
cost containment measures ( such as comprehensive wellness programs and
eligibility audits) that are utilized in other states and private industry. In addition, it
should monitor State health care expenditures to target costly areas needing additional
efforts.
Table of Contents
Page
Introduction and Background . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finding I: The State Needs To Redesign
Its Outmoded Hiring System . . . . . . . . . . . . . . . . . . . . . . . .
State Hiring Process Has
A Multitude Of Problems . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Major Reforms
AreNeeded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finding II: DOA Needs To Address
Fundamental Problems With
The State's Classification System . . . . . . . . . . . . . . . . . . . .
Classification System Is
A Crucial Element . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Poor System Maintenance
Due To Lack Of Funding
And Review Schedule . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Neglect Affects Several Vital
Components Of Personnel System . . . . . . . . . . . . . . . . . . . . . . .
Proposed Changes Premature Until
Funding Is Addressed And
Needs Assessed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Table of Contents ( Con't)
Page
Finding Ill: DOA Should Improve
Efforts To Inform Decision
Makers On Salary Issues . . . . . . . . . . . . . . . . . . . . . . . . . . .
State Employee Salaries Lag
Behind The Market And Inflation . . . . . . . . . . . . . . . . . . . . . . . .
Low Salaries Impact Recruitment
AndRetention . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
DOA Should Provide Decision Makers
With Information And Options . . . . . . . . . . . . . . . . . . . . . . . . . .
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Finding IV: DOA Needs To
More Proactively Manage
Its Employee Health Care
Benefits Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decisions Made To Contain
Costs Result In Controversy . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Number Of Actions Needed
To Avert Future Problems . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional Actions Needed
Once An Award Is Made . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Table of Contents ( Concl'd)
Page
Finding V: The Division Should Implement
Mechanisms To Curb Escalating
Health Care Benefit Costs . . . . . . . . . . . . . . . . . . . . . . . . . .
Health Benefit Costs
Rapidly Rising At The
National And State Levels . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Division Should Consider
Aggressive Cost Containment Measures . . . . . . . . . . . . . . . . . . .
Personnel Division Needs To Monitor Costs
To Effectively Target Its Cost Containment Efforts . . . . . . . . . . .
Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agency Response
INTRODUCTION AND BACKGROUND
The Office of the Auditor General has conducted a performance audit and Sunset
Review of the Department of Administration, Personnel Division, pursuant to a
December 13, 1991 resolution of the Joint Legislative Oversight Committee. The audit
was conducted as part of the Sunset Review set forth in A. R. S. § § 41- 2951 through
41- 2957, and is the first of six audits scheduled on the Department.
Reform Of The Personnel System Is
Needed To Ensure A Balance Of Fairness
Against Efficiency And Effectiveness
" The primary organizational problem personnel management faces is that of
balancing the goals of protection and eficiency. Should public administration
be organized to protect employees from the " adverse" consequences of political
patronage, or to maximize the eficiency of service delivery?"'
In order to meet the needs of its users, Arizona must significantly revise the manner
in which personnel services are provided. The basic principles of a civil service system
are to ensure fairness and equality. However, recent trends in government have been
to make personnel systems more responsive to user needs while continuing to uphold
these principles.
Despite these trends, Arizona's personnel system is not responsive to its users in
several important service areas. Although some efforts are being taken to change the
system, a comprehensive approach will be necessary for effective reform.
Civil Service Designed
To Ensure Fairness
Civil service or " merit" systems are comprised of the laws and rules developed to
uphold principles of fairness, equality, and open competition in all areas of public
sector personnel management. More than 25 years ago, Arizona established a merit
system for State employees under a centralized personnel authority. This system
included provisions for selection decisions based on applicant qualifications, fair and
open competition for positions, evaluations of employee performance, the creation of
a salary plan and a system of classifying positions, establishment of employee
1. Daley, D. 1990. " Organization of the Personnel Function: The New Patronage and Decentralization. " Public
Personnel Administration Problems and Prospects. Englewood Cliffs, N. J.: Prentice Hall, pp. 21- 37.
grievance procedures, and other measures designed to ensure employees receive fair
and equitable treatment in all aspects of personnel management.
Recent Efforts Designed
To Create More Responsive
Personnel Systems
Although merit system principles continue to have broad- based acceptance, civil
service laws and rules that were often enacted decades ago are increasingly seen as
straightjackets which prevent systems from being efficient and flexible, as is demanded
by economic and social conditions in today's workplace. These systems were
characterized more than 45 years ago as the " triumph of technique over purpose," because
public personnel managers became so enamored of the techniques by which their
work could be done that they lost sight of what they were supposed to do. As a
result, instead of facilitating the organization's work and mission, public personnel
offices often assume a policing function that hinders effective management.
This situation has led the Federal government, as well as many states and local
governments, to examine and discard personnel systems that rely on extensive rules
and restrictions, and build systems that are flexible and responsive. A 1993 survey by
the National Association of State Personnel Executives found 33 of the 48 states
responding ( including Arizona) are undergoing some form of personnel reform, with
seven states embarking on extensive reform of their civil service. These " reformed"
public personnel systems operate more as customer service organizations. For example,
the State of Washington recently enacted legislation that changes the civil service
system objective from control to customer service. Minnesota also concluded that its
50- year old personnel system "... is too complex and unresponsive to meet the needs of
government and the people it serves" and has initiated efforts to increase their system's
flexibility and decentralize many decision- making responsibilities to agencies.
Arizona's System Unresponsive In
Several Important Areas
The characterization " triumph of technique over purpose" is clearly applicable to the
Arizona personnel system. Our audit work, presented in Findings I through V of this
report, suggests that in the most important service areas -- hiring, classification,
compensation and benefits -- DOA is not responsive to the needs of its users. This
includes a broad definition of users, from agency management, to individual
employees, to the Legislature. A logical conclusion about the role of the Personnel
Division can be drawn from the problems we identify in this report. In those areas
in which the Division should be active, providing services they are best suited for and
communicating needs ( i. e. classification, compensation, and benefits), DOA officials,
through conscious policq~ decisions or neglect, have been passive, thereby failing to
meet users' needs. Conversely, in the area of hiring, where users ( agencies) desire
limited involvement by Personnel in the form of advice and direction, DOA has
chosen to take a strong and active role. This role includes establishing and enforcing
rules that significantly limit agency administrators' decision making in the selection
of their single most important resource: employees. These facts suggest a system that
will require more than just minor changes to correct.
Significant Reforms
Are Necessary
Currently, DOA is taking some steps to change its system. However, recent
experiences in other states suggest that more substantial reform efforts will be
necessary in Arizona.
Based primarily on the recommendations of the 1992 SLIM evaluation of the Personnel
Division, DOA has initiated efforts to improve the provision of personnel services.
These include:
I
The creation of a task team comprised of Personnel Division and State agency
representatives, charged with redesigning the State hiring process.
A study of the current job evaluation methodology utilized in the State's
classification system.
The formulation of a strategic plan for future personnel services.
It is too early to determine the value of these projects, because at the time of this
writing, they are either incomplete or their conclusions and recommendations remain
in draft form. However,. these efforts appear fragmented since there is little or no
coordination between the projects, although they share many common goals. Further,
some analysts of public personnel reform would characterize these efforts as " tinkering
at the margins," and suggest that to effectively change Personnel's role, more
meaningful reforms will be necessary.
Audit Scope
Our audit report of the Department of Administration's Personnel Division presents
findings and recommendations in five areas:
The need for improvement in recruiting State employees
The need to strengthen the State's current employee classification system
H The need for improvement in employee compensation practices
The need to strengthen the health care benefits process
H The need for improvement in the area of health care cost containment
This audit was conducted in accordance with government auditing standards.
The Auditor General and staff express appreciation to the Director and staff of the
Department of Administration and its Personnel Division for their cooperation and
assistance throughout the audit.
FINDING I
THE STATE NEEDS TO REDESIGN
ITS OUTMODED HIRING SYSTEM
" Government is a service business. It doesn't produce a product nor does it depend
principally upon technology to accomplish results. It depends largely upon people:
providing services, making policy judgements, consulting with elected
representatives and citizens on what services should be provided. Government
probably more than almost any other business, is dependent upon the quality, the
judgement, and the motivation of the people who work on the front lines. "("
Arizona's hiring system should enable the State to attract and hre the very best of
those people interested in State service. The current hiring system falls short of this
goal and may actually impede agencies' abilities to hire the best applicants. The
solution is a system overhaul -- one which will include significant changes in the way
Personnel does business, major rule revisions, and the possibility of statutory change.
Until the system is redesigned, DOA Personnel should use all available means to
provide better service and increase agency participation in the current hiring process.
State Hiring Process Has
A Multitude Of Problems
The State hring system can deter the best candidates from obtaining jobs. According to
hring supervisors, the hiring lists provided by Personnel often contain unqualified
candidates. Additionally, most agencies are forced to operate within a maze of rules and
policies that at times border on the ridiculous. Others have been able to get DOA's
authorization to circumvent policies that hnder effective hring decisions. Some agencies,
frustrated with the centraked hiring services, have obtained authority to perform the
hring functions themselves.
Hiring process ovmiew - The Employment Section in DOA Personnel provides
employment services to most State agencies, and its primary product is a hring list.
When a supervisor becomes aware of a vacancy, he or she submits a requisition to
Personnel. I€ there is an existing register of candidates for the position, Personnel
generates a hring list from the register, sometimes performing additional screening to
identify special qualifications. When no register exists, a Personnel Analyst will advertise
the position, screen each application to determine whether minimum qualifications are
1. The Washington State Commission for Efficiency and Accountability in Government. Workforce 2000
Personnel System Study, Final Report. March 1990, page 1.
5
met, and then give numerical scores to those applicants meeting the qualifications.' The
top seven scoring candidates will be placed on a hiring list and sent to the supervisor. 2
The list is intended to provide the supervisor with a small group of candidates best
qualified for the position.
& ring supervisors are generally dissatisfied with the results of this process. In a survey
of hring supervisors conducted by the Human Resources Hiring Process Task Team;
when asked, " Haw would you rate the present hiring process in meeting your needs", 50
percent of the 258 hring supervisors responding rated it as poor or below average, whle
37 percent rated it as average, and less than 7 percent rated it as either above average
or excellent
Hiring- lists contain unsuitable candidates - After waiting up to eight weeks for a hiring
list, supervisors often find candidates unsuitable. During our audit work, many
supervisors conveyed a variety of problems with the lists, such as: the candidates are
unqualified, unavailable, or uninterested in the job; and the lists may be months old and
contain candidates who have been hred, or were previously interviewed and rejected.
Due to the lack of suitable candidates on the list and their inability to review additional
applications, some supervisors have felt forced to hre candidates who they felt were
unqualified for the job. For example, we tracked the outcome of 24 h n g lists generated
between October 1992 and March 1993.4 Of the 24 positions, 3 were filled with a person
the supervisor felt was unqualified to do the job. The three positions included an
Eligibility Interviewer, a Training Officer, and a Transportation Engineering Specialist who
the supervisor said did not have appropriate roadway design experience. Two supervisors
canceled requisitions, preferring to leave positions vacant rather than to hre from the list.
Other supervisors expressed relief that they had been able to find one qualified, available
person from the list provided. In fact, 17 of the 24 supervisors would have reviewed the
applications of additional applicants if they had the ability.
Presented below are comments made during our telephone survey by different
supervisors regarding the quality of candidates.
1. Approximately 80 percent of job candidates meeting the minimum qualifications are scored by
Personnel Analysts. The remainder are scored through written examination or skills declaration.
2. The hiring list may have more than seven candidates if groups of candidates have equal scores. For
example, if 5 candidates score 90 and 10 score 80, the list will contain all 15 candidates because all
equally scoring candidates must appear.
3. The task team resulted from a Project SLIM study that identified significant inefficiencies in the hiring
system. The multi- agency team is designing hiring process changes to improve efficiency and service
to agencies.
4. The sample was designed to ensure a broad mix of position types, State agencies, and Personnel
Analysts. The 24 hiring lists selected involved 9 different job serles -- 10 different grade levels within
grades 9 through 24, 11 agencies, and 9 different Personnel Analysts.
. ~ s u a l l y1 am grasping at strazus to find even one marginally qual@ d applicant."
I . Unqualified candidates get on the hring list for a job that involves complicated and
techrucal decision making. " We have actually had people beg to be fired because they were
I so unqualifid to do the job." . When conducting interviews for a Public Assistance Eligibility Interviewer position,
I the supervisor asked the candidate what was her greatest work accomplishment
The candidate responded that it was when she finally was able to get an ice cream
cone made without the ice cream falling sideways. The supervisor said to us, " these
I are the type of people I have to intevuiezo."
Enforcenmt of ineffective policies ne- g ativelv impacts agmtcies - Personnel requires that
most hring supervisors follow existing rules or policies even when they are
counterproductive or not in the agency's best interest For example: . We identified one case where, in order to get a list of additional candidates, a
supervisor was required to offer an interview to a candidate that did not speak
English. The services of a translator were necessary. . In another case, a supervisor had only a few available candidates on the list and
because all of them worked for h s agency, he was aware of their qualifications. He
contacted Personnel and told them these people were not qual~ fied for the job.
According to the supervisor, he was told that it did not matter whether he thought
they were qualified-- based on written documents supplied by the candidates, they
were qualified. Personnel refused to provide additional names. . One manager tried to hre a current employee into a supervisory position. The
employee had managerial experience in a related field, but not in the specific field
set forth in the qualifications. Therefore, the employee was ineligible for
consideration. After trying unsuccessfully to get Personnel to reconsider, the
manager felt forced to hire a person who had not managed in several years and
had minimal experience using computers, a daily function of the position. This
individual quit witkun four weeks. Shortly thereafter, the manager also lost the
employee she had wanted to hre.
To net the hiring process to work, DOA bends the sslstem - While the majority of I sup& visors are constrained by an ineffective system, we identified numerous examples
of Personnel granting rule waivers or informal allowances to the process. For example,
while most supervisors can consider only the seven candidates provided, we found many ) cases where Personnel had granted rule waivers allowing supervisors to review all
candidates. We also found waivers allowing some supervisors to recruit at colleges or job
I fairs, which is typically unallowed. Other exceptions result from individual Personnel staff
decisions to allow agencies more flexibility. For example, one hiring supervisor was
allowed to score candidate applications himself, even though current rules prohibit agency
staff from scoring candidates. Additionally, Personnel has allowed some supervisors to
use " substitute" qualifications, whle others told us they were unable to update invalid
qualifications.
Some agencies, dissatisfied with Personnel's ability to meet their h gnee ds, solicited
and received DOA's authorization to hre independently for certain positions. For
example, the Department of Corrections has authority to recruit and staff its Correctional
Service Officer positions, and the Attorney General's Office performs hiring functions for
the majority of its covered positions.
Major Reforms
Are Needed
A comprehensive reform effort is needed to change h o n a ' s hiring system and will
require rule revisions and possible statutory changes. However, Personnel can take a
number of immediate steps to improve the process.
DOA Personnel should redefine its role fimz enforcement to service - Consistent with
personnel reform efforts across the country ( see Introduction and Background), Personnel
should reshape its organization to prioritize service to agencies and move away from
viewing its mission as rule enforcement For example, Personnel should provide State
agencies with increased options in hiring services; options whch include: 1) hring
responsibilities performed jointly by Personnel and the hring supervisor, and 2) hring
primarily done by the agency, with Personnel functioning in an advisement and
monitoring capacity.'
Additionally, agencies and Personnel should work jointly to communicate the importance
of merit principles, and to develop systems to hold supervisors and managers accountable
if they violate them.
Personnel is currently taking steps to improve service to agencies. Some agency
representatives expressed that the new administration is open to change and moving in
the right direction. Also, Personnel has a leadershp role in the Human Resources Hiring
Process Task Team. At the time of our audit, the task team was considering a number
of changes to the hring process and recommending a review of statutes and rules for
possible amendment. Because the task team is still in the process of determining needed
changes, it is unclear whether their final recommendations will address the major rule
revisions and statutory changes that are key to achieving an effective hring system.
1. Even in its new role, Personnel can ensure merit principles are followed through an expanded audit
function. As agencies take over functions now performed by Personnel, the State will need better
mechanisms to audit and correct problems. Although audits are currently done on a limited basis,
there are no positions dedicated and no formal audit schedules or procedures.
Statutow chang- es maw be needed - At least two statutes appear to prevent the achieve-ment
of needed flexibility in the hring system:
First, A. R. S. 541- 783.5 requires that candidates appear on hiring lists " in mder of
relative excellence." This statute has been interpreted to require numerical scoring of
all candidates. In some cases, however, numerical scoring and rank ordering may
not be valid or efficient The option of simply listing all candidates as " qualified" or
" unqualified" should be available when it is more efficient
Second, A. R. S. 538492 requires the awarding of preference points to veterans and
handicapped candidates who take examinations for employment. These statutes may
be adversely impacting State Affirmative Action goals and workforce diversity by
causing many W gli sts to be dominated by veterans. Because veterans receive
points over and above those of equally qualified nonveterans, the hring list may
contain & veterans when there is a high volume of qualified candidates for a
position. Wlule some public sector entities have eliminated veterans' preference
points or restricted their usage, Arizona has not
Major rule revision is needed - Some existing rules limit the State's options to respond
creatively to its diverse hiring needs. Although many of these rules can be waived, a rule
waiver requires the approval of the Personnel Director. Thus, agencies are forced to abide
by a bureaucratic system whch delays response to meeting their needs. Instead of
continuing with a system that constrains both agencies and the Personnel Division, rules
should be changed to allow flexibility to respond to diverse circumstances. Listed below
are examples of rules that may be particularly problematic.
Agencies are prohibited from administering any candidate evaluations other than
the interview
Applicants must be State residents
Supervisors must use luring lists comprised of internal promotional candidates prior
to allowing outside recruiting
Hiring lists are limited to seven candidates
firing at above entrance salary is prohibited without raising the salaries of all
current employees performing in the same job class.
Personnel should make immediate improvements - In the interim, whle statutes and rules
are being changed, Personnel can relax rules and policies to effect immediate
improvement in hiring processes. Key suggestions for change are discussed below.
Allow Agencies Greater Freedom To Design Supplemental Applications - In
some cases, especially in techrucal positions, the standard State application does not
elicit enough information speclfic to the skills needed for the job. According to the
employment law expert we consulted, there is no legal problem caused by using
supplemental applications designed by the agencies. Some agencies, such as the
Department of Economic Security, are currently using supplements to obtain more
information regarding the applicant's specific job skills.
Allow Supervisors to More Easily Update Inappropriate Job Qualifications -
Several personnel supervisors and staff told us that outdated qualifications are a
fundamental problem in the system. Additionally, 10 of the 24 hring supervisors
we surveyed said the minimum qualifications ( MQ's) for the position we inquired
about were inappropriate. Inappropriate MQ's can, if too strict, screen out good
candidates; or, if too lenient, cause unnecessary scoring and allow unqualified
candidates to receive hgh scores. Currently, MQ's can be amended on a
case- by- case basis by obtaining Personnel's permission to use a Substitute MQ.
However, according to one supervisor, " it takes an Act of Congress to get an MQ
change." Additionally, the Substitute MQ does not accomplish a permanent change,
but must be requested each time the position becomes available.
Allow Supervisors Maximum Participation In Candidate Evaluation - The majority
of hiring supervisors are not even contacted during the hring process. Candidates
not scored through written examination ( over 80 percent of candidates) are
evaluated by a Personnel Analyst, who reviews the application and awards scores
based on how closely the application reflects the abilities and experience outlined
in the rating plan. However, many hring supervisors view the analysts as not
having sufficient knowledge of the job to design the rating plan or determine
whether the candidate's experience is applicable. In addition, the rating plans are not
scrutinized for validity or reliability.
More Readily Correct Candidate Scores - Personnel should make candidate score
corrections when appropriate. If the results of investigations into a candidate's
background, education, or work hstory bring out information that affects h s or her
rating, Rule R2- 5- 205. E. 5. allows the rating to be adjusted. Many hring supervisors
provided us with examples of candidates on the hring list who did not have the
necessary qualifications, but appeared unaware that a correction mechanism exists.
Others told us that it is difficult to get Personnel to make score changes.
Allow Access To Additional Candidate Names - When hring supervisors want
to review the applications of additional candidates, Personnel should make these
available. l h s can be accomplished by enabling supervisors to review all candidates
meeting minimum qualifications ( referred to as full- list certification), or to obtain a
supplemental hiring list Personnel already uses rule waivers to make full- list
certification available to many supervisors, and should consider issuing a policy
describing the conditions in which it will be provided. In other cases, when
supervisors have documented that candidates are unavailable or unacceptable,
Personnel should release supplemental lists.
Timely Purging of Candidate Names From Registers - Personnel should ensure
that candidate registers are kept current For some positions, rather than advertising
externally, a hiring list is generated from an existing register of candidates.
However, luring supervisors complained that the lists are often outdated and
contain candidates who are either no longer available, not interested in the job, or
have been interviewed and disqualified for the position several times. Personnel is
not using the extent of its ability provided by rules to remove names from the list,
nor has it made clearing names a priority. According to one official, it may be
months before names are cleared from the lists.
Allow Targeted Recruiting - Targeted recruiting, which allows taking applications
and interviewing candidates at colleges and job fairs, should be made available to
all agencies. Personnel should consider waiving the rule on a Statewide basis, rather
than approving requests on a case- by- case basis, as is done currently.
Low salaries will continue to affect q~ mlihi of Jzires - Changes in the hring system are
of critical importance, yet the effect of State salary levels should not be underemphasized.
Whle Arizona's hring system should provide the mechanism to attract and hre the best
of those people interested in State service, salary levels that are far below market may
significantly reduce the pool of interested candidates. See Finding III for further discussion
of compensation issues.
RECOMMENDATIONS
1. DOA Personnel should begin a comprehensive reform of the State hiring system,
including:
Shifting Personnel's role from rule enforcement to service
Reviewing statutes and preparing recommendations for the Legislature
Redrafbng the Personnel rules
2. In the meantime, Personnel should relax operating practices and rules to increase
service to, and participation of, State agencies in the huing process. Particularly,
Personnel should allow:
The design of supplemental applications by agencies
An expedient method to update inappropriate job qualifications
Maximum supervisor participation in candidate evaluation
Correction of candidate scores
Access to additional candidate names
Prompt purging of names from registers
Targeted recruiting at colleges or job fairs.
FINDING II
DOA NEEDS TO ADDRESS FUNDAMENTAL
PROBLEMS WITH THE STATE'S
CLASSIFICATION SYSTEM
Fundamental issues need to be addressed in the State's classification system before
anticipated changes are made. While a classification system is an essential element of
an effective and efficient organization, the State's system is not properly maintained
or managed. This neglect impacts hiring and compensation, vital components of the
personnel system. Currently, DOA is considering significant changes to the
classification system. However, efforts to modify the existing system may be
premature, particularly until funding issues are addressed, and an assessment of
needed changes is developed.
Classification System Is
A Crucial Element
Classification systems provide large organizations, such as the State, with a structured
process to define and determine compensation for a sizeable number of positions. The
classification system is so basic and essential to an organization's functions it can be
called its " backbone." Through evaluating positions and grouping similar jobs, the
classification system provides for equitable compensation and establishes a hierarchy
of positions. For each position, the classification system should provide:
A clear and accurate description of the job and its duties and responsibilities;
The level of compensation for the position; and
A description of the skills, experience, education, and training needed for the job.
The State's classification plan, required by statute, uses the whole job method to
evaluate jobs. In this method, each position is evaluated based on factors such as:
difficulty of duties, qualification requirements, nature and scope of decisions, and type
of supervision.
Poor System Maintenance
Due To Lack Of Funding
And Review Schedule
Although crucial to the State government's effective operation, the classification system
is not adequately maintained. DOA officials indicate that lack of funding has
hampered efforts to maintain it.
Svstem is not maintained - Despite its overall importance, DOA is not ensuring that
the State's classification system remains current. To do so requires the Personnel
Division to conduct periodic reviews of each classification to determine the actual
work conducted, appropriate levels of compensation, and a comparison of position
rankings. While a prior Auditor General review of the Personnel Division ( see Report
81- 9) found the classification system had not been maintained since its adoption in
1969, our current analysis indicates a continued lack of maintenance over the last
several years. Specifically, from 1988 through 1992, only 22 percent of all State
government classifications ( representing 38 percent of all positions) have been
reviewed by Personnel. Further, some classes have not been reviewed for over two
decades. For example, according to a Personnel Division official, Right of Way Agent
classes at the Arizona Department of Transportation have not been reviewed since
1968. In fact, the system is so neglected that DOA could not confirm for us the
reviews done in the past ten years, until a list was constructed specifically at our
request.
Lack of funding irnpacts efforts to maintain svstem - According to DOA officials, a
lack of funding to implement salary adjustments resulting from classification reviews
hampers the Personnel Division's efforts to maintain the system. These officials
indicated that after the Legislature chose not to fund the salary adjustments associated
with several reviews completed by the Personnel Division in 1989, DOA elected to
discontinue any regular program of classification reviews. Instead, reviews are limited
to those agencies able to assure funding for any recommended upgrades, or those that
can show they are experiencing operating problems stemming from outdated classi-fications.
Neglect Affects Several Vital
Components Of Personnel System
Fundamental elements of the personnel system cannot function properly when the
classification system is not kept current. Because of outdated job descriptions, agencies
are often unable to recruit candidates with the skills to meet the agencies' needs.
Further, failure to perform classification reviews results in compensating employees
inappropriately.
Hiring i~ rzpacted hi outdated specificntiosts - Hiring, crucial to an effective State
government, is hampered when position specifications are not kept up- to- date.
Maintaining current position specifications, including minimum qualifications ( or the
minimum education, experience, and skill requirements considered necessary for a
position) are a basic function of the classification process. As such, when classifications
are not kept current, applicants are screened using minimum qualifications that no
longer reflect the job functions. For example:
PUBLICA SSISTANCE LIGIBILITINYT ERVIEWERS
Employees in this position authorize significant State expenditures of welfare
monies and other entitlement programs. Qualities needed in these positions
include: decision- making skills, investigative skills, ability to interpret laws, and
the ability to do math calculations. However, according to DES officials,
applicants passing minimum qualifications are those with only receptionist and
public contact experience, such as working at fast- food restaurants.
TRANSPORTATIOENG INEERS
These classifications have not been reviewed in over a decade and include
minimum qualifications requiring construction experience, which, according to
ADOT officials, " severely limits our ability to hire" because " we do not need
constvuction" experience in this particular position.
PLANNERS
According to agency management, the best candidates are eliminated from
consideration. Applicants with research and environmental planning skills are
screened out by the requirement for supervisory experience, which management
feels is unnecessary for this position. This class has not been reviewed since 1976.
Lack of classification reviews affects conzyensation - When classification reviews are
not performed on a regular basis, the State's system of compensating employees is
affected in several areas. Pay grades are established from determination of what is
appropriate compensation for job duties, responsibilities, and qualifications. As such,
when classification reviews are not current, inequities may occur between what is
appropriate pay for functions performed in a position and pay actually received.
Inequities may also result between positions when employees perform jobs similar in
responsibilities and duties, but receive different compensation.
Proposed Changes Premature
Until Funding Is Addressed
And Needs Are Assessed
DOA is currently evaluating substantial changes to the State's classification system.
However, these changes may not be needed to ensure an effective classification
system. Before attempting to modify the system, DOA should assess what changes will
be most effective. DOA should also address the historical problems of obtaining
funding for the system. Finally, DOA should evaluate a new classification strategy
with important implications for reforming the personnel system.
Proposed chan- g es to have significant impacts - Based on the 1992 SLIM report on the
Personnel Division, an outside consultant is reviewing the job evaluation methodology
utilized in the current classification system. The consultant is anticipated to
recommend that DOA adopt a new and significantly different job evaluation
methodology that ranks positions based on an assignment of points to the various
functions performed in each job. However, if DOA accepts this recommendation, a
considerable initial investment, preliminarily estimated at $ 68 million for the first year,
will be needed. This estimate includes expenditures for:
New computer software and hardware;
Training for classification analysts; and
Initial salary adjustments associated with the review.
In addition, agency operations will be impacted by the need for managers and
employees to participate in detailed analysis of descriptions and job duties of all
current positions, while morale and productivity may suffer if employees become
concerned about positions being affected or eliminated.
Changes maw not be necessaw - Making significant and costly changes to the
classification system may not be needed to ensure its effectiveness. Preliminary reports
from DOA's consultant indicate that a new job evaluation methodology is needed to
reduce the number of classifications and eliminate the " subjectiveness" of the current
methodology. However, personnel experts we have spoken with indicate that the
number of classifications could be reduced using the current methodology, and that
the point factor methodology the consultant is anticipated to recommend is susceptible
to similar criticisms of subjectiveness. These factors suggest that, before embarking on
a major effort to change the job evaluation methodology of the current classification
system, DOA should first determine what it hopes to achieve from any changes, and
then seek the necessary legislative support. Specifically, DOA needs to determine those
changes that will best assist State agencies in accomplishing their missions. Modern
classification systems recognize organizational needs and are designed to incorporate
such factors as:
Responsiveness to organizational change
Career development
Employee performance and accountability
Flexible compensation programs
Delegation of classification responsibilities
However, our audit work indicates that DOA has made only a limited effort to obtain
input from stakeholder groups. While DOA's consultant conducted interviews of
agency administrators, employees and legislators who also have an interest in the
creation of an effective classification system were not contacted.
To ensure the classification system's effectiveness, DOA must also address the
historical absence of funding needed to maintain it. As discussed earlier, DOA has
basically halted any efforts to maintain the current classification system, based on the
perception that the Legislature will not fund the salary adjustments associated with
reviews. Any future systems will also become outdated if they are not maintained.
Before DOA can embark on any effort to revamp and upgrade the classification
system, legislative involvement and support will be an important step.
Franzework for modern classification s~ starzsl zould be evaluated - When assessing the
most appropriate changes to the existing system, DOA should also evaluate a new
model for classification systems that has important implications for reforming the
overall personnel system. This model, developed by the National Academy of Public
Administration ( NAPA) for the Federal government, classifies work, rather than
positions, because " classifiing work places an organization in the best posture to develop,
promote and use the skills of its work force." By grouping similar classes together, and
establishing levels that allow for logical career paths within each class, the NAPA
model supports a flatter organization, values generalists and the knowledge and skills
of workers, allows greater job mobility, and encourages employee development.
Several public and private entities are implementing or studying NAPA's
broadbanding model, including the States of Minnesota and Washington, nationally
recognized for their efforts to reform their personnel systems. Both states are using the
broadbanding model not only to flatten their organizations, but to create an
atmosphere that will be conducive to changing their personnel systems.
RECOMMENDATIONS
DOA should develop a plan to establish the future purpose and direction of the State's
classification system. This plan should include:
What State government hopes to achieve from its classification system,
The strategies to reach these goals, including the most appropriate framework
and method of job evaluation, and
An approach to obtain legislative support for the need to maintain and enhance
the classification system.
FINDING Ill
DOA SHOULD IMPROVE EFFORTS TO
INFORM DECISION MAKERS ON SALARY ISSUES
Although State employees are an essential resource of State government, employee
salaries have not remained competitive. While salaries were only 7 percent behind the
market in 1988, lack of salary increases has now increased the gap to over 22 percent.
As a result, State agencies have difficulty attracting and retaining high- quality
employees. To date, DOA's efforts to impact compensation decisions have been
curtailed due to the timing of its recommendations, as well as DOA's tendency to base
its recommendations on available funding after all other budgetary priorities have been
addressed. For DOA to have a meaningful impact on compensation decisions, it needs
to provide the Governor and Legislature with timely, objective, and comprehensive
reports detailing various alternatives.
State Employee Salaries Lag
Behind The Market And Inflation
Lack of salary increases have caused State employee compensation to fall significantly
behind the market. Further, when coupled with inflation, lack of salary increases have
served to decrease employees' purchasing power.
Salaries la- g behind market - According to the Joint Governmental Salary Survey
conducted by the Personnel Division, the average State employee salary is 22.5 percent
behind the average market salary as of July 1, 1992.' For some positions the gap is
even greater -- electricians and physical therapists are 29 percent behind market. The
market lag grew quickly during a four- year period in which there were few or no
increases in State employee salaries, while there were approximately 3 to 5 percent
annual increases in the market salaries.
Real income has decreased - The lack of salary increases in recent years is having a
major impact on employees' purchasing power. Due to the effects of inflation, real
income has decreased for State employees. Over the last five years, inflation has risen
almost 16 percent, while State employee salaries rose only 3.1 percent. The cumulative
1. The methodology utlllzed In the Jolnt Governmental Salary Survey, and ~ tcso nclusions, were recently
vd1ldatt. d In consultant's analysls for the Governor's Offlce of Excellence In Government.
effect of this gap is that real income for the average State employee decreased by
$ 2,436 from fiscal year 1988- 89 to fiscal year 1992- 93'.
Although commonly held that the level of benefits State employees receive compensate
for the difference in salary, this is not the case. Recently, Coopers and Lybrand
performed an analysis of the Joint Governmental Salary Survey and found that
benefits do not bridge the 22.5 percent pay gap. The study noted that an employee
whose salary alone is 20 percent behind the market is still 17.8 percent lower than
market when benefits are included.
Low Salaries Impact
Recruitment And Retention
Low salaries have impacted the State's efforts to recruit and retain qualified
employees; however, efforts to address salary issues have been fragmented.
Low salaries hamper recruitment and retention - Low State salaries have hampered
recruitment efforts for many positions. A review of current literature on compensation
shows that employers who consistently pay salaries lower than the market rate will
have a difficult time attracting a sufficient number of qualified people. In fact, when
asked what factors prevented the hiring of qualified people, hiring supervisors we
surveyed cited low salaries more than any other factor. Further, our panel of agency
Personnel representatives listed low salaries as a significant problem hampering their
efforts to attract and employ quality individuals.
The lack of competitive State salaries also contributes to problems in retaining
employees. According to current compensation literature, when pay is below market,
an employer will not be able to retain people no matter what other retention efforts
are made, and turnover will tend to increase. The hiring supervisors on our panel
indicated that this holds true for the State in that the low salaries are causing
problems with employee retention. In fact, two State agencies whch conduct exit
interviews found that over 50 percent of the respondents left State service due to low
salary. Turnover is quite costly for the State -- current literature suggests that turnover
costs can run as high as $ 5,000 per position filled. This figure includes not only the
cost of recruitment efforts to refill the vacant positions, but also the cost to train new
employees, and the productivity lost due to the vacancies.
Fra- g nzerzted approach used to address problems - In recent years, a piecemeal effort
has been made to increase State employee salaries, resulting in fragmentation of the
compensation system. State agencies have pursued a number of avenues in an effort
1. The impact of inflation on the average State employee's income was calculated using the average
metro Phoenix Consumer Price Index ( CPI) for each fiscal year from 1988- 89 to 1992- 93 ( provided
by the center for Business Research, Arizona State University).
to obtain salary increases for their employees. Typical methods used to increase pay
for particular individuals or positions include:
SPECIAALP PROPRIATIO- N ASg encies have lobbied the Legislature for additional
salary monies. Some agencies, such as the Department of Corrections and the
Department of Public Safety, have been successful in obtaining additional monies
for salary increases.
SPECIALR ECRUITMENRTA TES- Some agencies facing recruitment problems are
granted permission by DOA to offer a starting salary above the minimum in the
salary range.' Use of special recruitment rates is not uncommon , and they are
used for 144 classes in the State service, or just over 9 percent of all classes.
However, this practice causes salary compression by bringing newer employees
in at rates near or above existing employees.
RECLASSIFICATIO- NBSas ed on special requests prepared by agencies, DOA will
review specific positions to determine whether the position should be reclassified
to a higher grade level. During 1992, agencies received DOA approval to
reclassify over 1,600 positions ( or 5 percent of all State employees).
VOLUNTARGYR ADED ECREASE- AS gencies are able to obtain pay increases for some
employees by manipulating two Personnel rules. First, the employee takes a
voluntary grade decrease and in most cases, retains his/ her former salary per
Personnel rules. Then, the employee is promoted back to his/ her original grade
and receives the mandatory 5 percent increase in pay required by the Personnel
rules. Because these actions are not tracked, we were unable to determine the
frequency of such occurrences; however, DOA officials indicated that this practice
is not uncommon.
While State agencies may be successful in increasing salaries for particular individuals
or classes, the overall salary problems continue. Further, such approaches to salary
increases cause inequities between similar positions in other departments and agencies.
DOA Should Provide Decision Makers
With Information And Options
While DOA has been charged with providing salary recommendations, its
recommendations are of limited value. DOA's recommendations are based on available
funding rather than the results of its analysis. For DOA to have a meaningful impact
1. Personnel rules mandate that new hlres must be compensated at the entrance rate for the pay grade
for the posltlon, unless a speclal recruitment rate is authorized by Personnel.
on compensation decisions, it needs to provide the Governor and Legislature with
timely, objective, and comprehensive reports detailing various alternatives.
DOA should provide independent recommendation - Currently, the DOA Director is
required by statute to " make an annual recommendation to Legislature and the Joint
Legislative Budget Committee of a salary plan and adjustments to the plan for employees in
the State service ... on m befare January 1 of each year."
In reality, the DOA Director's annual recommendation is guided by the executive
budget proposal, rather than the salary plan adjustments needed to maintain an
adequate compensation system. The DOA Director stated that the annual
recommendation is a political document and as an appointee of the Governor, his
recommendat,. ,) n should be consistent with the Governor's budget. Therefore, recent
annual recommendations have been made based on the budget monies available. The
link to the budget is so great that DOA even sought to have their reporting date
changed from December 1 to the current January 1, in order to coincide with the
release of the Governor's budget.
For a meaningful recommendation to be made, DOA needs to change both the nature
and timing of its recommendation. As the State's compensation professionals, DOA
should be providing decision makers with complete and objective information on the
compensation of State employees. If DOA does not provide this information, there is
no one else who will do so. Further, the compensation information should be provided
before budget documents are compiled and decisions regarding budget priorities are
made. Ths would allow both the Governor and the Legislature to consider all the
needed information, and then allow the political process to determine whether salary
issues will become a budget priority.
DOA should provide more comprehensive information - While DOA provides the
Legislature with salary information in its annual recommendation, it is limited to the
results of its annual salary survey. The report includes only the percentage by which
State salaries lag behind the market in six broad categories.
Other states provide much more comprehensive information in their compensation
reports. These reports include analysis on average pay levels, market comparisons, and
other useful information. Some examples of the types of information other states
compile include:
Specific compensation information, such as employee distribution by grade,
average annual salary, amount of sick and annual leave accumulated, cost of
leave taken per employee, and the cost of overtime
Comparisons with other states, such as rank in average state salary and rank in
state employees per population
w Trends, such as average salary differences over the last five years and the cost
of leave taken over last ten years
DOA should present alternatives - To further improve the annual salary
recommendation, DOA should present alternative solutions based on analysis of the
salary plan. For the recommendation to be effective, each alternative should be
presented clearly, with a discussion of the compensation problem it is intended to
solve, how this alternative will work to solve it, and what the effects will be. For
example, DOA could present alternatives for across- the- board salary increases,
increases that target groups experiencing high turnover, or increases that target groups
whose salaries are farthest from the market. In addition, it could provide varying
funding choices such as a specific percentage salary adjustment, a fixed- dollar general
salary adjustment, or a particular percentage merit increase, and discuss the effects of
each. At a minimum, DOA should provide the following information for each
alternative:
w Description of the alternative,
w Advantages and disadvantages,
w Suggested priority order for actions to be taken,
w Suggested implementation strategy,
w Cost impact,
w Employees affected, and
w Other analysis or information useful to decision makers.
RECOMMENDATIONS
1. The Legislature should consider amending A. R. S. 541- 763.5 to require that the
annual salary recommendation be made to the Governor and the Legislature by
early fall of each year, and that the recommendation include alternative
approaches to compensation issues, in order to address the State's compensation
problems.
2. DOA should prepare recommended salary adjustments based on the results of
its analysis and allow policymakers to determine whether the salary issues will
become budget priorities.
FINDING IV
DOA NEEDS TO MORE PROACTIVELY
MANAGE ITS EMPLOYEE HEALTH CARE
BENEFITS PROGRAM
The Department of Administration's Personnel Division needs to more proactively
manage State employee health insurance benefits. In early 1992, in an effort to prevent
significant premium increases to the State, the Division made several controversial
decisions. These decisions, however, increased costs and/ or reduced services to both
State employees and retirees. To prevent similar problems from occurring in the
future, the Personnel Division needs to ensure that State employees' health care needs
are defined in conjunction with the Legislature and State employees, that usage is
monitored, and that its Request for Proposals is specific. Further, whenever a new
contract award is made, DOA needs to ensure that employees are adequately notified,
and that carrier performance is monitored.
Decisions Made To Contain
Costs Result In Controversy
In an effort to thwart an increase in health care costs, DOA made several controversial
decisions. These decisions resulted in reduced services and increased out- of- pocket
costs for a number of State eri, yloyees and retirees. Due to considerable pressure from
many sources, the Division has made some changes to specifically address these
problems; however, their cause has not been addressed.
Decisions made to avoid cost increases - In 1992, the Personnel Division received a
proposed premium increase of over 26 percent from its health insurance carriers. The
Division projected that the premium increases would cost the State an additional $ 44
million per year. However, the Governor mandated that there be no increase in State
funding for employee health insurance. After weeks of negotiations with the insurance
carriers, the Division determined that they had reached an impasse.
In an effort to prevent an increase in State health insurance premiums, the Division
made several controversial decisions. First, the Division decided to place the health
insurance contracts out to bid, rather than continue the current contracts, although
there was very little time to complete the bidding process. In addition, the Division
changed the way bids were requested to separate the more expensive groups, retirees
and rural employees, from the general risk pool ( to discontinue subsidizing of these
groups by urban State employees). The Division also allowed the carriers to define the
coverage they would provide, rather than the Division explicitly indicating the State's
needs. Finally, the Division selected a cost- sharing strategy whereby the State
contributes an equal amount toward premium costs for each employee located in a
given geographic region, rather than contributing more toward the more expensive
plans. While these decisions did result in savings to the State, employees and retirees
suffered the following consequences:
Because the counties were bid individually, insurance plans offered different
coverage for rural and urban employees. While HMO coverage had been
previously available in most counties, in many rural counties HMO coverage was
either eliminated or altered such that it was no longer a viable option. Many
State employees in rural communities found that while HMO coverage was
available, their community either lacked providers and/ or a participating hospital.
Further, urban employees were no longer offered an indemnity plan.
Retirees, rural employees, and those urban employees enrolled in non- HMO plans
were faced with huge out- of- pocket increases. Some retirees saw premium
increases of over 50 percent ( from $ 485 to $ 757 per month for family coverage).
Further, some rural State employees were offered only indemnity coverage and
were faced with paying up to $ 1,250 per person or $ 2,500 per family in
out- of- pocket expenditures.
Some employee populations were left without coverage for their medical
conditions, although they had coverage under past plans. For example, a prior
plan had covered durable medical equipment and diabetic supplies, and the new
plan limited coverage for some of these items. In other instances, medical
conditions were covered, but at a much greater cost. For example, hospice and
home care which had previously been available through the indemnity program
at 80/ 20 and no limits was limited to 70/ 30 coverage, M ith a $ 7,500 maximum.
Employees in rural areas of the State reported that they were unable to find
providers. In some instances, the employees found that providers listed in the
directory were not accepting new patients.
Because new carriers were added and these new carriers had a short lead time
to begin providing service, employees received inadequate service from the
carriers at the beginning of the plan year. Claim payments were delayed for over
two months by one carrier, and some employees did not receive plan information
or identification cards from two carriers for several months.
Division took action to reduce burden on etnuloz/ ees - After receiving pressure from
employee groups, legislators, the media, and an employee petition drive, the Division
made some changes to the medical plans to address employees' concerns over
coverage and cost. The Division added coverage for conditions that had been omitted
under the new plans and decreased deductibles and out- of- pocket costs for employees
living in the rural areas. The Division also encouraged the development of HMOs in
some of the rural areas to provide plans with lower employee costs. Although these
actions reduced some of the employees' financial burdens, they do not address the
problems' causes.
Number Of Actions Needed
To Avert Future Problems
DOA needs to take a number of steps to prevent similar problems from occurring in
the future. DOA needs to work with legislators and employees to define the State's
health care needs and goals. Further, DOA needs to monitor health care utilization to
prevent " surprise" increases. Finally, when DOA does go to bid, it needs to ensure that
its Request for Proposal ( RFP) is as specific as possible.
Division must define the health care program with irrput from concerned parties -
Because key policy questions regarding the State's health care program remain
controversial, decisions need to be made regarding what coverages should be
provided. For example:
What types of health care plans should be offered ( i. e. HMOs, Indemnity, PPOs)?
Should coverages and costs vary between urban and rural employees?
Who should be covered ( i. e. retirees and current employees)?
What level of coverage should be provided?
How should costs be allocated between the State and its employees ( i. e. equal
contribution for each employee versus greater subsidizing of the more expensive
plans)?
Should the current contracts be renewed or rebid?
In defining State health care program needs and goals, DOA needs to work in
conjunction with the Legislature. In procuring the health insurance programs in 1992,
the Division excluded legislators from its decision making process. Not only did the
exclusion result in less- than- desirable coverage for employees and retirees, it
eliminated the Legislature's ability to take action to avert the problem. For example,
during a legislative meeting, a legklator indicated that had the Legislature been aware
of the increasing cost of the former health care plans, it may have elected to continue
those plans by funding the premium increase, instead of offering an employee raise.
Further, legislators noted that the decision to separate retirees from the rating pool
drastically impacted their policy to offer early retirement packages to employees.'
Further, because decisions so strongly impact employees, efforts should be made to
ensure that employee interests are considered and to identify potential problems.
Other states, as well as other Arizona employers we contacted, indicated that they use
employee focus groups, surveys, and committees when planning benefits programs.
Division does not monitor claims experiences - As described previously, the Division
was surprised by the large increases proposed for renewing their contracts in 1992 and
this was due, in part, to a lack of utilization data. Utilization data is critical in
allowing the Division to know how much carriers are expending for claims, and
whether premium increases may be warranted during contract negotiations. Although
the State's provider contracts require monthly, quarterly, and annual utilization reports,
the Division has not ensured that all carriers have submitted these reports on a
consistent basis. In addition, when information is received, it is often untimely,
incomplete, and unreliable.
Our panel of benefits managers indicated that employers must push the carriers into
providing data on how health care dollars are being spent. Without obtaining this
information, the Division cannot monitor and evaluate the services carriers are
providing or determine what medical services the State is paying for.
REP needs to be specific - Contrary to its 1989 RFP, DOA's 1992 RFP was vague with
regard to the State's desired health coverage. According to DOA officials, the RFP was
intentionally left open so that the Department could identify the most cost- efficient
carriers in each area of the State. However, by not dictating what coverages it desired,
the State was left to choose from the various plans offered and varying benefit levels.
Thus, when the contracts were awarded, employees in various geographic regions had
varying plans and different benefit levels.
In the future, DOA should prepare a detailed request for bids specifying the coverage
desired for State employees. The RFP should detail the plan design and specify
deductibles and co- insurance levels. If the Division needs to explore alternative plans,
this can still be done in the RFP. The State of Kansas, for example, included several
questions for the carriers about options they were considering, after they had
presented the specific plan design. The RFP also allowed carriers to bid an alternate
plan in addition to those that were specified.
1. After being excluded in 1992 decisions, the Legislature enacted legislation in 1993 establishing the
Legislative Oversight Health Insurance Benefits Review Committee. The Committee has been charged
with reviewing some of the more controversial problems stemming from DOA's 1992 decisions,
including whether retirees should be regrouped with State employees, whether there are ways to
minimize the differences in coverages between rural and urban employees, and whether employees
who terminated coverage in the last six months of 1992 should be allowed to reenroll.
Additional Actions Needed
Once An Award Is Made
When DOA awards new contracts, it needs to ensure that employees have sufficient
information regarding coverage options on which to base their selection decisions.
Further, DOA needs to monitor carriers to ensure they are meeting contract
requirements.
Conzmunication re- g ardin- g coverage options is important - During the open enrollment
period in 1992 in which the new benefit plans were introduced, employees received
incomplete information regarding them. Although the State was adding new carriers
and eliminating coverages with others, employees could not determine from materials
provided what medical conditions would be covered. For example, employees enrolled
in one plan were not informed for several months that allergy shots were not covered
on an out- of- network basis. Further, although the State held meetings for employees
to learn about the new plans, carrier representatives were not present and the Division
representatives providing the information lacked specifics.
Other states use a variety of methods to distribute benefit information. For example,
Nevada produces a video presentation of the benefits plans to use at open enrollment
meetings and for new employee orientation. Ohio and Utah arrange a health benefits
fair at open enrollment where carrier representatives are on hand to answer questions
for employees.
Once employees select health plan options, DOA needs to ensure that they promptly
receive information regarding how and where to obtain medical services. In 1992,
employees enrolled in some programs did not receive users manuals until two months
after the date coverage began. Complaints were received that employees were
confused about where to go for treatment. This was especially problematic for those
enrollees who experienced medical emergencies.
Divisiosz needs to nzonitor carrier performance - The Division should monitor the
carrier's performance to ensure employees are receiving adequate service. The Division
has set several performance standards for the carriers in the contract. For example,
carriers are required to pay 90 percent of claims within 14 calendar days of receipt,
achieve a payment processing accuracy rate of 95 percent, and have a 75 percent
satisfaction rate. The contract also allows monetary penalties for failure to meet these
standards on a quarterly basis.
Although empowered by the contract to monitor performance, the Division has failed
to do so adequately. Without this monitoring, the State does not know if the carriers
are meeting the contract terms. Further, the State map not be collecting the penalties
to which it is likely entitled. For example, one carrier delayed some claims payments
well beyond the 14- dav standard for the first quarter of the plan year, however the
Division did not determine the extent of the delays, and thus does not know if the
State is entitled to a 5 percent reduction in the carrier's retention fees for the quarter.
RECOMMENDATIONS
1. In making major policy decisions, the Division should include employees and the
Legislature in the decision making process to help define goals for the health
insurance plans.
2. The Division should establish the design of the health insurance plans prior to
beginning the procurement process, and include the specifics of the plan design
in the RFP.
3. The Division should improve communications with employees on the benefits
programs.
4. The Division must work to obtain utilization information from the carriers and
use this information to project potential carrier premium increases and determine
their validity.
5. The Division must monitor the health insurance program and evaluate the
insurance carriers for achievement of performance standards, assessing the
contractual penalties for nonperformance.
FINDING V
THE DIVISION SHOULD IMPLEMENT MECHANISMS
TO CURB ESCALATING
HEALTH CARE BENEFIT COSTS
Soaring health insurance costs have forced governments and private companies across
the nation to seek control over further increases. Arizona's cost to provide its
employees' health benefits has risen to $ 168 million, with additional increases on the
horizon. While the Personnel Division has taken some steps to curb costs, it should
consider implementing additional cost containment measures utilized in other states
and private industry. In addition, it should monitor health care expenditures to target
costly areas.
Health Benefit Costs
Rapidly Rising At The
National And State Levels
Nationally, the cost of health care is increasing at a rapid rate. Currently, the medical
inflation rate is outpacing the Consumer Price Index and insurers are predicting that
the cost for the typical medical plan will increase 20 to 25 percent per year. In fact,
studies predict that by the year 2000, employers will need to spend over $ 20,000 per
employee each year to provide traditional health insurance plans1. Benefits literature
attributes the increasing costs to medical inflation, technological changes, and use of
costly medical treatments.
In line with national trends, Arizona has also experienced dramatic increases in its
health insurance, costs, with future increases predicted. Between fiscal year 1989- 90 and
1991- 92, the State's contribution toward employee benefits rose almost 35 percent ( from
$ 101 million to $ 135 million). Over this same period, the average premium cost paid
by Arizona per employee rose from approximately $ 2,400 to $ 3,000 ( 25 percent
increase). For fiscal year 1993- 94, the program will experience a cost increase of 5.9
percent overall, with one plan increasing by over 15 percent. One Arizona carrier
projects health care cost increases to be about 14 percent per year. Even if cost
increases were kept to 10 percent annually, the State would be expending over $ 200
million within 5 years.
1. H~ gginA~., F ., " Yes, Companies Cdn Cut Health Costs," Fortune Magazine, July 1, 1991, p. 52.
Rlmler, G. W., " Mdndged Care: the Solution or the Problem?," Benefits Revlew, May- June 1992, p.
39.
The Division Should Consider
Aggressive Cost
Containment Measures
Although increases in health care insurance are likely to continue, the Personnel
Division should consider implementing measures taken by other states and private
companies to lessen the extent of the increases. The Division has made some efforts
to curb its costs, yet additional efforts should be considered. " Carve out" programs
could be instituted to reduce the cost of mental health and drug programs. In
addition, implementing a wellness program and conducting eligibility audits could
lessen utilization of health insurance.
A variety of sources were utilized to identify commonly used cost containment
measures. We conducted an extensive literature search of over 100 current benefits
articles. In addition, we surveyed seven other states regarding their programs.'
Further, we interviewed human resources and benefits professionals representing
several major Arizona employers and held a panel discussion with a group of these
professionals. 2
From this research, we discovered a variety of cost containment measures currently
in place within other organizations. While the Personnel Division is already utilizing
some measures, such as the use of less costly managed health care plans ( i. e. HMOs
versus indemnity plans), we identified other measures which DOA should consider
implementing to curb cost increases. These measures are presented as follows.
" Came out" of mental health and prescription drug programs - Under Arizona's
current health benefit plans, all health care services are provided by the plan
providers. However, a number of Arizona employers and other State officials we
interviewed indicated that they have revised their plans to essentially " carve out" some
of their more costly services, including mental health and prescription drug programs.
These programs are then separately contracted and managed.
Managed mental health/ substance abuse programs could be an effective mechanism
to manage both costs and the care provided. Two of the larger Arizona employers we
interviewed indicated that they had implemented this type of program and had
positive feedback from employees; both felt that employees were receiving better care
than had been previously provided. Several other states, including New York and
Ohio, had also implemented managed mental health/ substance abuse programs.
1. We selected the states in our survey based on geographic location ( Utah, Nevada, and Colorado), a
similar covered employee population to Arizona ( Ohio and Kansas), and recognition in the literature
for having successful cost containment programs ( New York and Illinois).
2 Our panel cons~ sted of human resource and benef~ ts profess~ ondls from Salt River Project, Arizona
Publlc Strvlce, McDonncll Douglas, Honeywell, and the Clty of Phoen~ x.
Managed prescription drug programs are another means of providing better cost
control. Prescription drugs generally account for about 15 percent of an employer's
expenditure for health care, and the cost of drugs is rising at over 20 percent annually.
Some employers separately manage prescription drug programs and encourage the use
of less costly prescription drugs through techniques such as generic substitution,
differing copayments for brand name and generic drugs, use of a mail- order service,
and use of a formulary ( a predetermined set of cost- effective drugs).
Comvrehensive wellness vrogram - Studies indicate that wellness programs can be an
effective means of reducing utilization of medical plans through developing a healthier
workforce. Wellness programs typically include employee health screenings to
determine areas of health risk, educational programs aimed at educating employees
in health risk areas identified in health screenings, and follow- up screenings and
counseling to measure progress toward wellness goals. Further, some wellness
programs provide incentives to employees to encourage them to participate.
Although it is difficult to measure the dollars saved by wellness programs, there are
some compelling reasons for implementing them. Lifestyle- related illnesses are costly;
in fact, lifestyle- related costs are estimated to account for 55 percent of all health care
costs. One study indicated that employees who smoke or drink excessively, or who
are overweight, cost employers up to $ 900 per employee in excess costs per year.
Employers with comprehensive programs have experienced lower health care costs and
reaped additional savings from reduced absenteeism and turnover.
The Legislature, recognizing the value of wellness programs, passed legislation in 1990
requiring DOA to implement such a program. Further, funding for wellness programs
is available through the Special Employee Health Insurance Trust ~ und.' In spite of
the legislation and funding, the Personnel Division has developed a very limited
program consisting of a library of material for employees to use, distribution of a
wellness/ benefits newsletter, and offering of wellness classes. In fact, for fiscal year
1992- 93 the Division budgeted over $ 380,000 for wellness programs; however, as of
May 31, 1993, they have spent less than $ 34,000 for wellness activities.
Itrzvlementation of measures to eliminate ineligible dependents - Another means of
decreasing utilization of health insurance is by eliminating coverage for ineligible
dependents. Although enrolling ineligible dependents on insurance plans is a common
form of employee fraud, the Personnel Division does not have adequate mechanisms
in place to prevent or detect such occurrences. Prior to enrolling dependents, the
Division should require proof of eligibility. Currently, the Division limits its screening
efforts to a review of the enrollment application for inconsistencies ( such as children
with last names different from the employee's). Some other employers require
1. The Spec141 Employee Health Insurance Trust Fund was established by A. R. S. $ 38- 654 for use in
administering the State employee health insurance monies. These monies are collected from employer
and employee premlum contr~ butions and can be expended for health insurance premiums, cldlms
costs, administration, and pldn improvements. As of May 31, 1993, the Fund had a balance of over
$ 1 mill~ on available for wellness programs
employees enrolling dependents to provide supporting documentation, such as a
marriage license or a birth certificate.
In addition, the Division should consider conducting eligibility audits to identify
ineligible dependents who are already enrolled. The City of Chicago, for example,
conducted a year- long investigation which resulted in letters being sent to 1,988
employees questioning the eligibility of their 3,228 dependents ( the City had 130,000
employees, dependents, and retirees). The investigative report showed that there was
gross abuse of the City's health care benefits, including the carrying of ex- employees
who were no longer paying, and employees enrolling ineligible grandchildren and
college- age children.
Finally, the Division should develop a policy which includes penalties to deter
employees from enrolling ineligible dependents. Currently, Arizona has no such
penalty. The Division should establish a policy on handling employees who commit
enrollment fraud, and communicate it so that it is well known. Two of our panel
members indicated that it is their companies' policy that enrollment fraud is grounds
for termination. In addition, one of our panel members indicated that during open
enrollment, employees are given an " amnesty period" whereby they are provided with
clear notice as to which dependents are eligible, and then given the opportunity to
drop those who are not.
Personnel Division Needs To
Monitor Costs To Effectively
Target Its Cost Containment Efforts
For the Division to implement effective cost containment measures, it needs to obtain
comprehensive and accurate expenditure data from the carriers. Expenditure
information is critical for determining actions needed as well as monitoring the impact
of actions taken.
Necessrrn/ infomation lacking - While the Personnel Division receives expenditure
reports from its three carriers, the data does not allow the Division to adequately
analyze cost containment options. We reviewed the expenditure report submitted by
one of the carriers for the period of August 1 through October 31, 1992, and found
that the carrier listed a majority of claims paid as " unknown," and thus did not
indicate the types of services rendered. Without this information, the Division is
limited in its ability to determine what cost containment actions are warranted.
Part of the Division's problem in obtaining reliable data may stem from its failure to
require such information. The Division's contracts clearly indicate that it is entitled to
expenditure information from the carriers. While it has received information, it has,
to our knowledge, not attempted to force the carriers to submit complete and reliable
information. Further, we saw no evidence that the Division attempts to use the
information to routinely perform any analyses of its expenditures.
Cost containment efforts should be tarxeted and measured - Lack of comprehensive
expenditure information limits the Division's ability to identify needed cost contain-ment
measures. Expenditure information is critical to determining areas with high
expenditures, or problematic areas needing attention. This information should be used
in designing the State's wellness program and in modifying the design of the health
care plan. Other employers have used cost information to target their efforts to control
costs; for example:
One of our panel members commented that in reviewing trends in his company's
utilization data, he found that prescription drug expenditures were high, which
then triggered a decision to address this area through a carve- out from their
existing plans.
Another panel participant noted that reviewing the top ten expenses for his
company's health insurance program impacts what is offered through the
company's wellness program. For example, if premature babies are a top expense,
then prenatal care may be added to the wellness program.
A university in New York established a committee to identify potential cost
containment areas. The committee analyzed the employee population's health care
cost demographics and trends, and conducted a specific utilization analysis of the
health plans. As a result of its analysis, numerous changes were made. For
example, the indemnity plan was revised to make it easier and less expensive for
patients to seek mental health care on an outpatient basis. Further, the university
offered an incentive program ( cash payments of $ 300 to $ 500 per year) to
encourage employees to use their spouses' health benefits rather than the
university's plans. In addition, the wellness program was revised to offer
programs designed to address problems found during their health screenings.
Comprehensive expenditure information is also necessary to evaluate the effectiveness
of cost containment measures that are taken and to identify areas where further efforts
are needed. The Division needs to have information available on the utilization
expenditures of the health plans both before and after implementing cost containment
measures to allow evaluation of their impact. For example, a New York university
evaluation committee began with techniques that it later realized had limited value,
such as adjusting premiums to shift more costs to employees. By studying the impact
of its changes, the committee was able to evaluate its actions, and then make
additional changes to modify its efforts.
RECOMMENDATIONS
1. The Division should consider implementing cost containment techniques used by
other employers, including carving out of the mental health or prescription drug
programs, developing a comprehensive wellness program, and conducting
eligibility audits.
2. The Division should obtain adequate expenditure data on the health plans in
order to target and measure the effectiveness of cost containment efforts.
3. The Division should develop a policy regarding enrollment fraud, and make the
policy widely known to employees to deter its occurrence.
I Fife Symington
Governo!
J. ELLIOTT HIBBS
D~ rector
ARIZONA DEPARTMENT OF ADMINISTRATION
PERSONNEL DIVISION
1831 WEST JEFFERSON . PHOENIX, ARIZONA 85007
October 6, 1993
Douglas R. Norton
Auditor General
2910 N. 44th Street, Suite 410
Phoenix, Arizona 85013
Dear Mr. Norton:
Enclosed are our comments on the revised sunset report of the
Personnel Division.
We wish to thank you for the cooperation your sunset team
exhibited in developing the sunset report. The Personnel ~ ivision
is appreciative of the efforts made by the team to understand the
complexities of the State's personnel system.
Please do not hesitate to contact us if you have any
questions.
Sincerely,
G/ J. Elliott Hibbs
Director
tdilliam Bell
Assistant Director
for Personnel
JEH : WB/ crs
Enclosure
SUMMARY
The Department of Administration believes that the recommendations in the audit report
represent the customer oriented direction defined in the Department's vision and mission
adopted in November 1992. We, therefore, generally support the directions outlined.
The performance audit encompassed the Personnel Division's three primary service areas,
Employee Health Benefits Programs, Employment, and Classification/ Compensation. The
Division actively supports many of the recommendations contained in the report. Several
improvements not noted in the audit already have occurred, while others are under development,
with final implementation in some cases subject to funding approval.
Approximately two years ago, the newly appointed personnel director and his
management team embarked upon preliminary review of the service delivery and processes
performed by the Personnel Division. This review led to the conclusion that major reforms and
process modifications would be necessary before the Division would be able to proactively
address the existing deficiencies. For example, before any consideration relative to making
a transition to division- wide automation could begin, the entire building had to be rewired; the
antiquated employment system that was being used needed to be replaced; user friendly,
customer oriented service delivery processes needed to be encouraged and developed. A final
five- year strategic plan to create a modem, state- of- the- art personnel system will be completed
shortly. This will guide efforts to streamline the system in coming years.
Significant strides already have been made to enhance existing processes, and
more aggressive approaches are being developed for implementation with available resources.
These are identified in our response to each of the findings and recommendations as appropriate.
Finding I: The state needs to redesign its outmoded hiring system.
Recommendation 1: DOA Personnel should begin a comprehensive reform of the State hiring
system, including shifting Personnel's role from rule enforcement to service; reviewing statutes
and preparing recommendations for the Legislature; and redrafting the Personnel Rules.
Response: The Division began to design and champion an optimum statewide hiring process
in cooperation with the Governor's Office of Excellence in December of 1992. Three pilot
projects to assist in the implementation of this optimum hiring process are ongoing, with start
up of the new system projected to occur in early 1994.
The first pilot is a proactive partnering project involving five agencies and the Personnel
Division. Through the use of charters signed between an agency and the Personnel Division,
DOA will decentralize components of the hiring process by delegating to the agency those
components agreed to in the charters. The Personnel Division will house Human Resource
experts who will provide advice, guidance, technical information and training as requested, and
serve in a consultative and professional administrative role.
The second project under development will introduce a change in the processing of
applications and agency requisitions to fill vacant positions. A state- of- the- art software program
that scans resumes through artificial intelligence will be purchased. An applicant will use a
simplified application as a cover sheet to a resume; one application/ resume for any job in State
Service will be used; for some jobs a supplemental form will be used instead of a resume.
Agency supervisors will be able to electronically submit a requisition and initiate a paperless
transaction. Based on criteria established by a hiring supervisor in cooperation with a personnel
professional, a new software program can automatically review all available resumes and general
a short list of candidates who meet the criteria.
The third project will be an automated link between a Department of Economic Security
Job Service Office and the Personnel Division to establish on- line job information and
application processing. The Job Service Office will have updated information on jobs and
vacancies in State Service. Applications1 resumes will be directly scanned into the Personnel
Division's candidate pool and matched to any unfilled requisition.
To address necessary revisions to the Personnel Rules as a result of the new process to
be implemented, a task team is reviewing the statutes and rules applicable to State Service
employment.
Recommendation 2: Zn the meantime, Personnel should relax operating practices and rules to
increase service to, and participation of, State agencies in the hiring process. Particularly,
Personnel should allow: the design of supplemental applications by agencies; an expedient
method to update inappropriate job qualifications; maximum supervisor participation in
candidate evaluation; correction of candidate scores; access to additional candidate names;
prompt purging of names from registers; and targeted recruiting at colleges or job fairs.
Response: We concur with this recommendation to facilitate and enhance agency involvement
in the hiring process and have welcomed such participation in the past. To further improve the
quality of service, we have taken steps to encourage agency participation by:
- Continuing agency involvement in the development of recruitment supplements. In the
past two years, supplements for fifteen classifications have been developed with the
assistance of agency subject matter experts.
- Deriving job qualifications from up- dated PDQs rather than from the class specifications.
- Inviting hiring supervisors to participate in the evaluation of applications.
- Directing analysts to expedite the current process when candidate score correction is
warranted.
- Inviting hiring supervisors to review a register prior to a hiring list being issued; or,
when register review indicates need, placing additional names on the hiring list.
- Raising the priority of purging names from registers.
- Encouraging agency collaboration with the Personnel Division at colleges and job fairs.
Finding II: DOA needs to address fundamental problems with the State's classification
system.
Recommendation 1: DOA should develop a plan to establish the fiture purpose and direction of
the state's classijication system. This plan should include: what State government hopes to
achieve from it's classijication system; the strategies to reach these goals, including the most
appropriate framework and method of job evaluation; and an approach to obtain legislative
support for the need to maintain and enhance the classflcation system.
Response: In early 1992 the Governor's Office of Excellence recommended the formation of a
Position Correlation Studies Task Group made up of Coopers & Lybrand and Personnel Division
staff. This group noted many of the same concerns with the current method of classification that
were identified in this performance audit, i. e., it is too subjective; is slow and lacking in
responsiveness; is not universally understood or applied; is easily manipulated; uses internally
inconsistent- job matching; and is labor intensive. Identification of the concerns changed the
project focus from updating and improving the current classification system to recommending
a new job evaluation system, which would be the basis for a new classification system.
The Position Correlation Studies Group generally agreed that all classification systems
have strong and weak points, but a point factor method of job evaluation would address many
of the current concerns with the existing system.
The Position Correlation Studies Group used current state job classifications to test the
recommended point factor system, the Oliver System, before Coopers & Lybrand made their
final report and recommendation to the DOA Director in September 1993. Coopers & Lybrand
also recommended that the new classification system be implemented in concert with an
aggressive salary administration plan in order for it to be effective. The DOA Personnel
Division has strongly emphasized the need to address salary/ compensation problems in order to
maintain or implement any sound classification system. The Coopers & Lybrand
recommendation, as well as the Performance Audit Recommendation, reiterate that no
classification system will be effective until salary issues are addressed.
The Department supports the recommendation and will develop an approach to obtain
necessary legislative support to establish, maintain and enhance the classification system.
Finding 111: DOA should improve efforts to inform decision makers on salary issues.
Recommendation I: The Legislature should consider amending A. R. S. 41 - 763.5 to require that
the annual salary recommendation be made to the Governor and the Legislature by early fall of
each year, and that the recommendation include alternative approaches to compensation issues,
in order to address the State's compensation problems.
and
Recommendation 2: DOA should prepare recommended salary adjustments based on the results
of its analysis and allow policymakers to determine whether the salary issues will become budget
priorities.
Response: Budget and salary recommendations are inextricably intertwined. The Legislature
receives the Joint Governmental Salary Survey as soon as it is printed, usually six to eight weeks
prior to the annual recommendation. In the annual recommendation, the Department always
identifies the existing salary gap between the State and other employers, consistently advocates
for competitive salaries and urges that the gap be narrowed. We have offered alternative options
for addressing inequities; however, no specific proposals can be offered without considering the
ability to fund the proposal.
If the Legislature moves forward the date for the Annual Recommendation, the DOA will
adjust the Joint Governmental Salary Survey schedule as necessary in order to comply with
legislative requirements. The customary advance distribution of the survey results to the
Legislature and survey participants shall continue. The Personnel Division is currently
reviewing alternatives to collect, analyze, and prepare for publication the Joint Governmental
Salary Survey in an abbreviated time period. It is anticipated that this effort will streamline the
process.
Finding IV: DOA needs to more proactively manage its employee health care benefits
program.
Recommendation I: In making major policy decisions, the Division should include employees and
legislature in the decision making process to help define goals for the health insurance plans.
Response: The Department will be working closely with the Benefits Oversight Committee, a
legislative group established last session. Additionally, the Division has established the
Employees' Benefits Advisory Committee, an employee focus group. This body of 28 employee
members ( nominated by their respective agencies) will meet bi- monthly to discuss employee
benefits. The partnership between the Division and these two committees will provide a solid
forum for obtaining suggestions for benefit changes as well as to obtain feedback on potential
changes the Department may consider.
Recommendation 2: The Division should establish the design of the health insurance plans prior
to beginning the procurement process, and include the specijics of the plan design in the RFP.
Response: The Division agrees with the concept of the recommendation, but supports retention
of flexibility in an RFP to allow bidders to propose potentially innovative alternatives and/ or
viable design recommendations. The Division is currently in the process of developing a survey
of the major employers in Arizona for use in future RFP development. In this manner, the
competitiveness of the State's benefits plans will be maintained.
Recommendation 3: The Division should improve communications with employees on the benefits
programs.
Response: The Division agrees that communication is extremely important to the success of the
benefits plans. Since January 1993, the monthly newsletter " For Your Health and Benefits" has
been published and distributed to all employees. In addition to the regularly scheduled meetings
that are held throughout the state during each Open Enrollment period, the Benefits Section
implemented the " On the Road" program. This entailed monthly visits to various locations to
provide personal interaction between employees, D. O. A. benefits professionals and the carriers.
These meetings have been well received and have provided an additional forum to address
employee concerns and provide education about benefits. The Division is also in the process
of producing personalized employee benefits statements to be delivered to employees in early
1994. The focus group identified in the response to Recommendation 1 is anticipated to serve
as an additional communications conduit to agencies and groups they represent.
Recommendation 4: The Division must work to obtain utilization information j? om the carriers
and use this information to project potential premium increases and determine their validity.
Response: The Division has proactively monitored available information since 1983. Meetings
have been held with the carriers to facilitate the development of relevant reports. Analysis of
utilization data is used as an integral component in the RFP process. While we initially
experienced difficulties due to transition, all carrier utilization reports currently are meeting the
reporting requirements on a timely basis.
Recommendation 5: The Division must monitor the health insurance program and evaluate the
insurance carriers for achievement ofpe fomance standards, assessing contractual penalties for
nonpe fomance.
Response: The Division does monitor the receipt and validity of performance reports. An audit
of the carriers was requested in the Spring of 1993 to validate these reports. Penalties will be
assessed for nonperformance, as appropriate. However, if there are extenuating circumstances
beyond the carriers' control, there may be more appropriate means of resolving the issues.
Finding V: The Division should implement mechanisms to curb escalating health care
benefit costs.
Recommendation 1: The Division should consider implementing cost containment techniques used
by other employers, including carving out of mental health or prescription drug programs,
developing a comprehensive wellness program and conducting eligibility audits.
Response: The State has and will continue to implement cost containment techniques. It must
be considered, however, that many of those employers cited have done less to control costs to
date than the State has accomplished as an ongoing practice. Therefore, many of these programs
would be less useful for the State than they are for employers who have implemented them. For
example, the prescription programs currently in place offer as great a savings as would a stand-alone
plan. This is accomplished through the discounts negotiated by the carriers, the use of
generic drugs and formularies within the plans. Generally, carved- out mental health plans offer
a more comprehensive level of benefits than are available under current state plans. A study
performed by the Wyatt Company determined that the start up costs for implementation of a
carved- out mental health plan for the state would negate any potential savings. Additionally, the
State's wellness program is in the process of being further developed. Following the
development of a policy regarding eligibility enrollment fraud, eligibility audits will be
conducted.
Recommendation 2: The Division should obtain adequate expenditure data on the health plans
in order to target and measure the eflectiveness of cost containment eflorts.
Response: The Division continuously has utilized expenditure data to target cost containment
efforts and validate renewal requests. For example, in response to an analysis of the number
of low birth weight babies and associated complications, the Division has developed a
comprehensive prenatal care/ education program in conjunction with the State's carriers. Efforts
are ongoing to improve the quality of the data received from the carriers.
Recommendation 3: The Division should develop a policy regarding enrollment fraud and make
the policy widely known to employees to deter its occurrence.
Response: The Division agrees and is developing such a policy.